Rand stuck at R19/USD as Reserve Bank gears up for interest rate decision

The rand has been stuck at around R19/USD as markets worry about the deterioration in South Africa’s state finances, the risk of a global recession, and the US Federal Reserve’s aggressive monetary policy stance.

This is according to Investec chief economist Annabel Bishop, whose comments come ahead of the Fed’s interest rate decision on Wednesday and the South African Reserve Bank’s (SARB) decision on Thursday.

Over the past five days, the strongest the rand has been was around R18.92/USD, and its weakest has been around R19.09/USD.

Bishop said the Fed is expected to keep interest rates unchanged this week, but the risk of further hikes this year is one of the key reasons keeping the rand weak. 

Emerging market currencies, in general, have been weak compared to a year ago, as higher US interest rates weaken economic activity globally and locally and make emerging market assets less attractive to investors.

The rand is also being weighed down by domestic factors such as the widening fiscal deficit, the poor state of government-owned electricity and freight utilities, and load-shedding, she said. 

“The rand will indeed be at risk of government-determined factors both this year and next, as the fiscal deficit is widening, while rapid repair to Transnet’s rail lines is not occurring, and load shedding stifles economic growth and exports,” she said.

These factors are undermining investor confidence in the South African economy and making it difficult for the rand to attract sustained buying interest.

However, despite the current challenges, there are some reasons to be optimistic about the rand’s medium-term outlook. 

In particular, better-than-expected data from China has been a key factor in the rand’s performance over the past week.

“The world’s second-largest economy saw better-than-expected retail sales and industrial production data last week Thursday as stimulus measures started to take effect, boosting market optimism,” Bishop said.

However, there are still concerns around China’s real estate market, as new home sales saw a further month-on-month contraction in larger cities, and developer defaults remained a key concern.

Despite this, Bishop said the markets took the industrial production and retail sales data as showing a potentially brighter outlook than has been feared, as concerns had been building on the ineffectiveness of China’s stimulus measures to date.

Another positive for the rand is that South Africa’s economy is expected to recover in 2024, and the Fed is likely to start cutting interest rates at some point next year. 

This should lead to a weakening of the US dollar and a strengthening of emerging market currencies, including the rand.

In the meantime, the rand is likely to remain volatile as investors weigh the global economic outlook, US interest rate policy, and domestic factors, Bishop said.

However, the rand remains fundamentally undervalued, with fair value closer to R15.00/USD, and there is potential for significant upside gains in the medium to long term.

Here are some additional factors that could impact the rand in the coming months:

• The ongoing conflict in Ukraine and its impact on global energy and food prices.
• The outcome of the upcoming US midterm elections.
• The pace of economic growth in China, the world’s second-largest economy.
• The performance of the South African stock market and other asset classes.

Bishop said a more dovish Fed than expected would likely cause some US dollar weakness and, therefore, rand strength against the US dollar, with the opposite on a more hawkish US monetary policy tone, while South Africa’s Monetary Policy Committee is also expected to keep rates unchanged.

TreasuryONE currency strategist Andre Cilliers echoed Bishop’s comments, saying both the dollar and rand have been slightly firmer ahead of the interest rate decisions this week.

The dollar is also still trading on a firmer footing after strong US economic and inflation data last week. 

“The Fed is still overwhelmingly expected to keep rates unchanged but with a hawkish outlook given the higher oil price and higher inflation numbers,” Cilliers said. 

He said markets are also keeping an eye on the People’s Bank of China (PBoC) and the Bank of Japan’s (BOJ) interest rate decisions later this week.

The PBoC is expected to change rates, while the BOJ has hinted at being close to a move away from negative interest rates. 

The Bank of England also meets on Thursday, with markets expecting a hike of 25 basis points.

Cilliers said the SARB is expected to keep rates unchanged but remain hawkish on the back of concerns of an uptick in inflation on the back of the higher fuel price.

He said the rand was trading firmer against the dollar yesterday while also gaining against the euro and pound.