The rand is trading on the wrong side of R18/$ for the first time in more than three months, as expectations grow that US interest rates could go much higher still.
On Monday morning, the local currency fell to R18.06/$, after trading around R17.50 just a week ago. It started the year below R16.70.
Strong US jobs data, released last week, fueled fears that the US Fed could move to cool inflation with even higher rates.
AFP reported that the employment reading led several Federal Reserve officials to insist there was still a lot of work to be done before they were happy to get prices under control.
“These comments were particularly notable given that they explicitly rejected the narrative of year-end rate cuts, which markets had begun to assume would happen quite soon,” said Michael Hewson of CMC Markets.
Markets are now nervously awaiting US inflation data for January, due to be released on Tuesday.
“An upside surprise may move through risk assets like a wrecking ball after a slowdown in recent inflation readings has sparked renewed investor optimism for a possible ‘soft landing,'” Stephen Innes said. of SPI Asset Management.
Some economists are now forecasting that rates could go from the current 4.50% to 4.75% at six percent, AFP reported.
As the local economy falters, in part at record levels of load disconnection, the SA Reserve Bank has far less scope to raise rates further.
This is negative for the rand. If South African interest rates do not rise at the same pace as the US, the rand and local assets such as bonds will lose their appeal to foreign investors looking for good yields. Foreign inflows are crucial to keep the rand stable.
According to Peter Worthington, Senior Economist at Absa CIB, South Africa’s growth, current account, budget balance and real policy rates seem likely to decline relative to other emerging economies in 2023. “So South Africa may have difficulties attracting capital inflows, especially amid persistent load shedding and other infrastructure constraints.”
Foreigners were big sellers of South African stocks and bonds last week, JSE data shows.
