Weak rand sparks rate hike fears

A sharp turnaround by the rand on Thursday proved to be short-lived as it had erased all of its intraday gains by the evening.

After firming about 1.5% to R13.1003, it fell to R13.3612 to the dollar, after having started the day at R13.3019.

Analysts have expressed scepticism that any turnaround of the rand will be sustainable, warning that foreign factors remained the main driver of its fortunes, with pressure on the Reserve Bank to hike interest rates unlikely to abate soon.

The rand initially gained after the European Central Bank (ECB) left rates unchanged, signalling its intention to wind down its stimulus policies by year-end. The rand has lost 7.6% to the dollar in 2018, reaching its weakest level for the year, of R13.4419, on Wednesday. However, it is faring far better than the Turkish lira, which has lost 23% to the dollar in 2018.

The euro fell after the ECB appeared cautious as to when the first interest rate increase in nearly a decade could be expected, pencilling in the summer of 2019 as a possibility. This disappointed market hawks, sending the euro sharply lower to $1.1657 from $1.1793, with the rand following suit.

Investec chief economist Annabel Bishop said the US Federal Reserve decision to hike interest rates by 25 basis points on Wednesday could be followed by at least two more increases in 2018.

This is more than the market has priced in, until now.

“Over the longer-term the risk of depreciation towards R14 to the dollar remains, if perceptions of Fed communication in the third quarter become more hawkish,” she said.

The rand weakened to R14.4758 on November 13 2017, shortly before then-president Jacob Zuma was voted out as ANC leader at the party’s elective conference in December.

Local bonds were relatively steady despite the volatile trading backdrop, with the benchmark R186 government bond last bid at 8.96% from 8.98%.

Emerging markets have experienced large sell-offs by foreign investors over the past few months.

“This could be large enough to push central banks in Mexico, Brazil and SA to raise interest rates,” analysts at Capital Economics said.

However, they emphasised, the scale of any tightening in this country would probably be much smaller than had been undertaken by policy makers in Turkey and Argentina.