The rand fell to its weakest level against the dollar in four months on Wednesday, potentially clouding the outlook on inflation with resurgent international oil prices reflected in higher fuel prices.
Renewed pressure on the rand came after a surge in US government bond yields, which give investors attractive and almost risk-free returns at the expense of their emerging market counterparts, invariably perceived to be risky relative to paper issued by developed countries.
Yields on benchmark US 10-year note reached 4.80%, the highest since July 2007, according to Infront data.
As a highly tradable emerging-market currency, the rand tends to swing wildly in line with global market perceptions. For months, investors have been guessing when interest rates in the US and other developed markets will peak. Their monetary policy paths tend to have an outsize effect on emerging-market assets.
While the US Fed has managed to pull headline inflation back from historic highs of 9% to 3.7% through a cumulative 525 basis points rise in the repurchase rate over the past 18 months, it has yet to declare victory because prices rises have yet to return to 2% target range.
Earlier in the year, markets expected the world’s most influential central bank to start cutting policy rates in the fourth quarter, but the scenario has since been priced out of the market with core inflation in particular proving stickier than expected.
“It doesn’t appear that the spectre of higher rates is leaving us any time soon. Unfortunately, the moves in developed markets have an exponentially exaggerated impact on emerging market currencies,” said Ashley Dickinson, head of fixed-income dealing at Sasfin Wealth.
“Curiously though, our bonds are weathering the storm remarkably well, though to be fair we had priced in plenty of risk prior to this recent rise in global bond yields and we have some of the highest real rates of return ever at these elevated levels.”
The rand weakened to R19.43/$, the lowest point since early June early on Wednesday, before recovering slightly by the early evening to R19.22. However, it is still down more than 13% year to date, making it the third-worst-performing emerging-market currency behind the Turkish lira and Russian rouble.
The uncertain global environment could delay the expected easing in monetary policy by the Reserve Bank in 2024.
SA’s headline inflation has been heading in the right direction and is expected to average 5.9% in 2023, before further easing to 5.1% in 2024 and 4.5% in 2025, the midpoint of the target range at which the local central bank prefers inflation and inflation expectations to be anchored.
Two weeks ago, the Bank left borrowing costs unchanged for a second successive meeting but struck a cautious tone amid persistent upside risks to the inflation outlook and a decline in fiscal sustainability, which continues to drive the country’s risk premium.
Tax revenue collections are likely to be lower, given the weak economic growth, hobbled by electricity supply constraints and other structural challenges.
Long-term bond yields rose sharply in recent days, with the yield on 20-year SA government bond popping above 13% late last week, its worst level since the country was hit by the pandemic in March 2020.
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