Rand weakens through R18/$ for first time since November

The rand weakened past R18/$ for the first time since early November, casting a shadow on the outlook for inflation and interest rates trajectory.

The dramatic fall over the past few days is a blow to consumers and businesses desperately looking for a potential reprieve later in 2023 from the Reserve Bank, which has raised policy rates by a cumulative 375 basis points to 7.25% since it began its hiking cycle in November 2021.

But shifting global risk perceptions to which the rand is susceptible could delay an end to the hiking cycle.

The US nonfarm payrolls report for January, released just more than a week ago suggested a robust US labour market with 517,000 jobs having been created during the review month relative to market expectations of 185,000.

The jobs report supported the dollar at the expense of the rand as the buoyant US labour market was perversely cast in a negative light, effectively implying protracted high inflation and interest rates in the world’s largest economy.

“The jobs report is just one reading among the many relevant macro indicators. The market always reacts stronger to the latest releases, especially when they surprise,” said Cristian Maggio, head of portfolio and ESG strategy at TD Securities.

“We think US inflation will be sticky, albeit on a declining path, this year. This means higher rates — though not by a very large amount — and higher risks of a recession.”

US inflation has been heading in the right direction since levelling off in June, though the prevailing consumer inflation was nearly three times higher than the 2% range targeted by the US Federal Reserve (Fed).

Uncertain Fed policy has disproportionately affected the rand over the past week in particular, though Eskom’s inability to supply enough power, a situation likely to continue for the next two years, has also undermined sentiment.

In a sharp U-turn, the rand has fallen from 16.84/$ in mid-January, living up to its status as one of the highly volatile currencies among emerging market economies.

“If the rand stabilises at these weaker levels, it will have a negative impact on the inflation outlook and could trigger an extra interest rate hike,” said independent economist Elize Kruger.

“My view has been that the current repo rate level of 7.25% should be the ‘exit level’ of this interest rate cycle.”

The weaker currency increases the cost of imported goods — another blow to businesses already burdened by high electricity prices and poor supply, forcing them to turn to alternative power supplies, while consumers are coming under pressure from the rising cost of living.

The Bank expects inflation to average 5.4% in 2023 before easing to 4.8% in 2024 and 4.5% in 2025.

The rand is also sensitive to commodity prices, the prices of which fell over the past week as a result of the strong dollar.

At 7.50pm the local currency was at R17.85/$ after reaching an intraday worst of R18.08/$.

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