The rand breached psychological level of R19/$ on Thursday, reflecting broader market angst about the direction of US interest rates.
The bout of weakness followed the release of minutes from the US Federal Reserve’s most recent meeting in June, indicating that the majority of the officials were in favour of further tightening in policy to bring inflation down to a 2% target.
The hawkish tone of the minutes released late on Wednesday lifted the dollar against a basket of currencies, thus putting the rand’s recent recovery in jeopardy.
The renewed uncertainty surrounding the future path of US monetary policy and developed markets broadly comes as SA’s distinctive risks appeared to be abating.
Eskom’s grid capacity remains stable relative to earlier expectations while the threat of secondary sanctions against SA for allegedly supplying arms to Russia for the Ukraine war has subsided, though has not been resolved.
Over the past six months, the rand has swung wildly as forward-looking markets priced in scenarios of higher stages of load-shedding during the winter period. Its potential consequences were not only projected on economic activity, but also on inflation as businesses pass on the additional costs of diesel and other alternative power sources.
It plunged to nearly R20/$ in May on the combination of the geopolitics and power crises before rebounding as the situation on both fronts improved.
However, the renewed global risk aversion appears to have thrown its recovery off course, with the rand shedding 1.44% to R19.02/$ by mid-afternoon on Thursday.
The rand overshoots in either direction because of its highly tradable status. Its behavioural pattern is key to inflation trends, which the SA Reserve Bank monitors before adjusting its policy.
It has lost nearly 12% to the dollar since the start of 2023, potentially posing an upside risk to the inflation outlook. Markets have, until now, been betting that the Fed was at, or near, the end of its rate-hiking campaign, which would have given the rand further breathing space.
The Fed “needs to consider risk management across all its areas of responsibility: price stability, full employment and financial stability. And, while the former suggests the Fed should keep hiking, the latter two dictate a more cautious approach”, UBS said in its recent mid-year outlook note.
Higher US rates tend to see a withdrawal of investment in the rand, local bonds and equities since they — along with other emerging market assets — carry a risk premium to their counterparts in developed markets.
The Fed and policymakers in developed economies have been battling historic high inflation after initially regarding it as a transitory phenomenon fuelled in part by Covid-19 supply-demand imbalance.
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