The rand touched the strongest level in two months on Thursday, firming along with other emerging-market currencies, after a report showed US consumer inflation rose at a slower rate for a second straight month in December as widely expected.
The consumer price index (CPI) in the world’s biggest economy rose by 6.5% year on year in December, down from 7.1% the previous month, and declined 0.1% month on month. The numbers were in line with consensus forecast in a survey by Bloomberg, and offer confirmation that the Federal Reserve’s aggressive policy tightening is beginning to have an effect.
The data showed core inflation, which strips out the volatile food and energy components and is regarded as a better indicator of underlying price pressures, rose 5.7% year on year and 0.3% from the previous month. The core CPI readings also came in as expected, based on Bloomberg’s forecasts.
The rand rallied after the report, firming to an intraday best of R16.68/$, a level last seen in November. By 6.09pm, it had pared some of the gain, but was still 0.59% firmer at R16.8399/$. It was also stronger against the euro and pound, appreciating 0.18% and 0.21% to R18.1955/€ and R20.4824/£, respectively. The euro was 0.56% firmer at $1.0815.
“The continued slowdown in inflation adds to the argument for the Fed to pause its rate-hiking cycle soon,” said RMB analysts. “Nevertheless, inflation remains notably above the Fed’s target, and rates might need to remain restrictive for now to cool prices further and get inflation back to target.”
The risk-sensitive rand is likely to remain volatile in the short term as the outlook remains uncertain, “given all the talk of a global slowdown and the impact that load-shedding is exerting on the local economy”, said RMB.
The Fed slowed the pace of its rate hikes in December after a series of75 basis-point increases in 2022, and officials have suggested they could slow further at its February 1 federal open market committee meeting.
Still, inflation remains significantly above target and Fed officials have made it clear that convincing evidence that price increases are moderating is required, even if that inflicts some economic damage.
Carmen Nel, economist and macro strategist at Matrix Fund Managers, said the inflation data supports ongoing disinflation in the US, which should reinforce the market’s expectations for the Fed to change direction on its interest-rate trajectory.
“Overall the market’s response shows relief that there was not an upside surprise and would be keeping up with the consensus view that inflation is set to fall quite sharply,” she said.
“That said, the debate will shift to the sustainability of low inflation, close to 2% once the high base of 2022 has fallen out of the data,” added Nel.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.