Weaker rand shows little reaction to interest-rate decision, while euro falls

The rand was weaker on Thursday afternoon after the South African Reserve Bank kept rates unchanged, but the fall was ascribed predominantly to global factors.

The rand moved marginally off weaker levels during Reserve Bank governor Lesetja Kganyago’s speech. He said developments in the international environment had placed upward pressure on the inflation trajectory, while the domestic growth outlook remained challenging.

“The weaker rand exchange rate and higher oil price assumptions have also result in a more elevated inflation trajectory.”

The decision to keep the repo rate unchanged at 6.5% was expected.

The euro fell through $1.16 for the second time in two weeks as the market priced in further rate hikes in the US this year, following hawkish comments by US Federal Reserve chair Jerome Powell.

FXTM analyst Hussein Sayed said Powell’s positive assessment of the US economy and the fact that he downplayed the threat of a global trade war had also supported the risk-taking mood. “He also believes that the expansionary fiscal policy will continue to fuel the economy for at least two years.”

Powell dismissed concern about the flattening yield curve in US bonds and said it was not necessarily a sign of a looming recession.

US bonds yields have fallen to about 2.82% after reaching a high of 3.12% earlier in 2018, while short-term rates are climbing, narrowing the spread between the two bonds to only 30 basis points.

Bond yields normally rise when interest rates increase. However, this is not happening now, mainly because the European Central Bank and the central bank of Japan still have stimulatory policies in place with low bond yields, making US treasuries attractive.

At 3.18pm, the rand was at R13.4772 to the dollar from R13.2572. It was at R15.6303 to the euro from R15.4308, and R17.4864 to the pound from R17.3353. The euro was at $1.1598 from $1.1640.

Local bonds tracked the rand, with the benchmark R186 government bond last bid at 8.73% from 8.675% and the R207 at 7.43% from 7.385%.

The US 10-year treasury was last seen at 2.8688% from 2.8706%.