Rand gets reprieve as euro strengthens ahead of ECB policy announcement

The rand was relatively calmer on Thursday morning, strengthening against the dollar, as markets looked to the European Central Bank (ECB) meeting that could set the near-term direction for currency trading.

The ECB is widely expected to leave interest rates unchanged when it concludes its policy meeting in the afternoon, but could signal a timeframe to exit its unconventional monetary policy stimulus, known as quantitative easing.

The decision could boost the euro at the expense of the dollar, which provided a reprieve to the rand.

The local currency has been under considerable pressure over recent weeks.

It has lost about 15% of its value against the dollar since late February, due to a combination of factors including bouts of global risk-off trade and expectations of higher interest rates in the US.

As expected, the US Federal Reserve on Wednesday night raised rates by 25 basis points for the second time in 2018, and lifted its forecast for a total of four increases by the end of the year, instead of the three that were previously forecast.

In a press conference, US Fed chairman Jerome Powel painted a rosy picture of the US economy and labour market, as well as inflation, which he said was moving closer to the 2% target.

But there was a caveat to his positive remarks: that the Fed is not on a preset course to tighten monetary policy, meaning any future moves will be guided by incoming data.

The dollar initially rallied as Powel spoke, before losing ground in what could have been a “buy the rumour, sell the fact” scenario.

As the dollar initially strengthened, the rand slumped to lows of R13.44/$ before coming back to R13.20/$ in early trade.

Similarly, local bonds got off to a positive start, with the yield on the R186 fetching 8.88%, from its last settlement of 8.98%.

Analysts have said SA’s higher real interest rates provide an attractive proposition relative to some developed markets.

The yield on the benchmark US 10-year note was 2.9566%, after briefly crossing the psychological 3% mark on Wednesday.

Investec economist Annabel Bishop said with the Fed meeting out of the way, trading patterns suggested the rand could recover to R13/$ in the short term.

“However, longer-term [meaning the third quarter], the risk of depreciation towards R14/$ remains, if perceptions of [the Fed’s] communication become more hawkish.”

A weaker rand fuels inflation, though it’s a boon to exporters and other sectors.

At 10am, the rand was at R13.2020 to the dollar from R13.3019, R15.6037 to the euro from R15.6855 and R17.6916 to the pound from R17.7973. The euro was at $1.1819 from $1.1793.