The rand firmed to a more than 10-week high on bets that the Reserve Bank will yet again raise interest rates at its next monetary policy committee (MPC) meeting.
The local currency gained traction after worse-than-expected local consumer inflation data raised expectations that the central bank will increase rates again, possibly as soon as Thursday, when its MPC wraps up the first sitting of the year.
Inflation, as measured by Stats SA’s consumer price index, hit 5.9% year on year in December, its biggest annual increase since March 2017 when the rate was 6.1%.
The data, released last week, will put immense pressure on the Bank, which raised interest rates for the first time in three years in November, to hike the rate again.
“The MPC is widely expected by the markets to hike the repo rate this week, and the SARB tends to follow the expectations of the forward rate agreement (FRA) curve which has fully factored in a 25 basis point hike now,” said Investec chief economist Annabel Bishop.
The FRA curve depicts the market expectations of short-term interest rates in the future. Without delving into the derivative structures underpinning the FRA curve, one could simply interpret the curve as depicting investor expectations of the Bank’s monetary policy.
Market expectations can fluctuate, “while financial markets can also overreact at the start of a rate cycle, globally or domestically”, said Bishop.
The rand ended the week 0.69% firmer at R15.0927/$, its best close since November 9 2021. It was 0.46% firmer at R17.1234/€ and 1.21% stronger at R20.4355/£.
The rand also benefited from last week’s surge in commodity prices, particularly platinum group metals, after China’s central bank lowered mortgage lending benchmark rates to boost the property market.
“Recent Chinese cuts to key rates in its hope to bolster a slowing economy should lend itself to a supportive environment for the rand with China being such an integral trading partner with SA,” said IG senior market analyst Shaun Murison.
“The rand’s remarkable strength lately is also due to the rally in industrial commodity prices as investors price in expectations of increased demand from China this year.”
Despite the rand’s current performance, some analysts believe there are still factors that will see the local currency weaken throughout 2022.
BNP Paribas SA, the local branch of the French banking group, is not convinced of the durability of the rand’s gains, as the weak domestic economic outlook and an expected jump in US interest rates will erode the currency’s appeal. The group forecasts the rand to weaken to R16.50/$ by year-end.