Key moment for the rand next week: economist

The rand’s future course will be decided next week, with the US Federal Reserve (the Fed) expected to keep rates on hold.

Last Friday, 20 October, the rand strengthened to R18.50/USD after tensions regarding the Israel-Hamas conflict started to simmer, which reduced safe haven market behaviour, whilst the Brent crude oil price dropped from $92.3/bbl to $91.8/bbl, easing fears over inflation.

However, Investec Chief Economist Annabel Bishop said that volatility in the rand was seen again on Monday (23 October) after it reached a high of R19.15.

The weakening of the local unit came as global markets wait on the US’s next interest rate decision on 1 November, adding to risk-off behaviour.

Bishop said that the Federal Open Market Committee (FOMC) is expected to keep the Fed funds rate unchanged, with the central bank keeping a close eye on economic risks to global economic activity, which could have serious but uncertain implications.

Although the Fed said that it will remain restrictive until inflation moves down sustainability to its goal, Bishop said that cuts are expected from mid-2024.

The Fed’s key measure of inflation, the Core PCE deflator, is also due for Q3.23 and is expected to drop from 3.9% y/y to 3.7% y/y.

“A lower reading would support the US interest rate ‘on hold’ call for next week and likely give some strength to the rand. However, the key US inflation measure is still far removed from the Fed’s implicit inflation targeting of it at 2.0% y/y,” Bishop said.

However, it is not only the US which is impacting investor sentiment towards SA, as the weakness in the Chinese economy is hurting South Africa’s domestic currency, even if geological concerns have fallen.

Moreover, the US ten-year benchmark treasury (bond) yield grew above 5.0% for the first time in 15 years on expectations that the US will increase its borrowings as short-term rates stay higher for longer.

Although the Fed indicated that it could raise interest rates by 25 basis points due to the strength of other parts of the economy, Fed Chair Jerome Powell said that the increase in US bond yields are lessening the need for higher US monetary policy.

“Higher US treasury yields reflect higher long-term borrowing costs, impacting consumers and corporates,” Bishop explained.

“This, in turn, would be expected to have a suppressing effect on economic activity, and so inflationary pressures to an extent. A perceived lessening in the escalation risks in the Middle East conflict also weakened US treasuries’ safe-haven appeal.

That said, the high debt levels in the US, deficit worries and growing US treasury yields have also added to concerns, furthering risk-off sentiment and hurting the rand further.

“The FOMC meeting’s tone will be key next week, which, while expected to remain hawkish, is also hoped to provide some steer on the US rate cut cycle next year. The latter is key for the direction of the rand, which remains undervalued and is expected to benefit substantially from risk-on,” Bishop said.

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