Rand rollercoaster continues

A stronger dollar and expectations of fewer rate cuts than initially predicted have weakened the rand, as the local currency remains volatile ahead of the new US President’s inauguration.

TreasuryONE director and head of market risk Wichard Cilliers said the US dollar has maintained its bullish momentum, soaring to its highest level in over two years this week.

This strength comes on the back of a strong jobs report in the US, released on Friday, 10 January.

The data revealed an unexpected acceleration in US job growth for December and a drop in the unemployment rate to 4.1%. 

Cilliers explained that this has fueled expectations that the Federal Reserve will be less inclined to cut rates in 2025. Many traders now price in a single rate cut, down from previous forecasts of multiple cuts.

Investec chief economist Annabel Bishop said the implied fed funds futures now expect only a 25 basis point cut in US interest rates by December this year with 100% certainty, having moved back from expecting that the cut would occur in June this year instead.

“Markets are in the process of factoring out the chance of further interest rate cuts in the current US interest rate cycle and, as a consequence, emerging market (EM) currencies are weakening, particularly the rand, as flows into EMs are expected to slow,” she said.

The rand started this year at R18.78/USD, after reaching R17.60/USD in December, but it has been weakening since, reaching 19.23/USD on Monday, 13 January. 

The local currency recovered slightly below the R19.00/USD handle on Tuesday morning, supported by undervaluation and South Africa’s buoyant terms of trade. However, Cilliers warned that US inflation data on Tuesday afternoon could shift sentiment.

In addition to the jobs report, Cilliers said speculation surrounding US President-elect Donald Trump’s tariff policies has added to the dollar’s strength.

This is because his promised policies have led investors to anticipate moves that could increase US inflation, making rate cuts less likely in the near term.

Bishop explained that market sensitivity remains high, and the dollar has also gained as risk aversion has risen on market uncertainty.

This market response has been aided by statements and comments coming from Trump on a number of areas which have raised market concerns and reduced certainty.

“Under Make America Great Again, President-elect Trump highlights a number of plans which centre on placing US self-interest first in all dealings with all other countries, including forcing concessions and alignment to US foreign policy,” Bishop said.

“This has included statements on US territorial expansion and breaking international treaties, while deglobalisation on a polarisation on global trade relations is expected to intensify, along with a focus on commitment to a US-led Western alliance.”

“While some of the forceful statements are seen as strong warnings, with the US not actually expected to annex Panama and Greenland, for example, to improve US trade shipping access, the threats add to substantial uncertainty on a new world order.”

She explained that the previous Trump administration saw rand weakness on a strong US dollar. 

Now, higher tariffs are expected from this month on Trump’s inauguration, supporting higher inflation and, therefore, reducing US rate cut expectations, strengthening the dollar.

However, market uncertainty is not a US-specific trend, as investors are seeing volatility worldwide.

A recent report from the World Economic Forum (WEF) said the world is transitioning from a stable post-Cold War global order to a new, more unsettled, and unpredictable period.

“Political and geopolitical turbulence has the potential to degrade global cooperative efforts”, the WEF said, adding that the world’s collective security system is under severe pressure from geopolitical tensions.

The forum explained that global cooperation has stagnated since 2020, and comes as the world is entering a state of greater instability caused by high levels of electoral discontent and geopolitical rivalry.

2024 proved to be a year of significant political change, with elections in 72 countries that saw many incumbent governments facing strong voter backlash. 

In addition, the International Monetary Fund projects that global economic growth will be at historically weak levels, alongside a burgeoning debt crisis.

Consequently, financial markets have seen risk aversion rise to higher levels of uncertainty.

This tends to see the US dollar gain on purchases of US treasuries as EM portfolio assets are sold off, weakening EM currencies and, therefore, the rand against the US dollar.