Rand extends relief rally as dollar falters on Fed’s rates outlook

The rand continued to firm on Thursday afternoon, indicating fading concerns about the US Federal Reserve’s approach to interest rates in the coming months.

The local currency benefited from a sharp drop in the value of the dollar against a basket of currencies, notably the euro.

The sharp weakness in the dollar came hours after the Fed concluded its two-day meeting on Wednesday night, at which it hiked rates by 25 basis points, as expected.

The Fed also forecast two more increases in rates in 2019, instead of three, as promised previously. The US central bank also revised down its forecast for GDP growth to 2.3% in 2019, from 2.5% previously.

The rand retreated in the immediate aftermath of the statement, before subsequently recouping much of its losses against the dollar.

Local bonds were a fair bit firmer on the day, with the yield on the benchmark R186 government bond dipping below 9% for the first time since late August, according to Iress data.

The stronger rand and local bonds come as international oil prices sink further, helping  alleviate local inflation concerns.  Brent crude was nearly 2% weaker at $55 a barrel — its lowest level in more than a year. The now substantially lower international oil prices could help offset the net effect of a weaker rand environment, thus limiting the scope for the South African Reserve Bank to increase interest rates further.

In November, the Reserve Bank raised its repurchase rate by 25 basis points, to 6.75%, citing the effect of a weaker currency on the inflation outlook, among other factors.

The value of the rand has dropped 14% so far in 2018, due, in part, to higher interest rates in the US, which resulted in bond outflows from emerging markets.

Foreigners have sold a net amount of about R63bn worth of local bonds so far in 2018, contributing to sharp rand weakness.

At 3.23pm, the rand was 1.34% stronger against the dollar at R14.1944, 0.69% stronger against the euro at R16.2574, and 0.83% stronger against the pound at R17.9941. The euro was 0.66% stronger against the dollar at $1.1454.

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