The rand came under tremendous pressure on Monday (September 19) as the country feels the pressure of phase 6 tax shedding, and markets look ahead to rate hikes from major central banks.
TreasuryOne noted on Monday that South Africa’s power crisis has continued to worsen, with Eskom warning of “the risk of an unprecedented level of power outages,” which is likely to weigh on local currencies over the next week.
Nedbank economists, meanwhile, said the intensification of power outages late in the week has pushed the local currency to its lowest level against the US dollar since August 2020.
However, despite the impact of tax shedding, the local currency is still led by movements in the major US and UK markets.
Nedbank said the rand has been particularly affected by global headwinds – with emerging market currencies being dragged down by US inflation data released on Wednesday (Sept. 14), which indicated that the US Federal Reserve at its meeting of this week would aggressively raise its key rate.
“This week, all eyes are on the US Fed’s policy meeting on Tuesday and Wednesday. The Fed has maintained its aggressive rhetoric in recent weeks, with Chairman Jerome Powell stating that the Fed is deliberately shifting its policy stance to levels that will be restrictive enough to push inflation towards its 2% target,” Nedbank said.
The Fed is widely expected to raise interest rates by 75 bps on Wednesday. Meanwhile, the Bank of England is also set to hold its monetary policy meeting this week – given upside risks to inflation, it is also expected to rise 75 bps.
This view was shared by Investec chief economist Isabelle Bishop, who said the rand was looking at 18.00 rupees to the dollar, feeding on this negative sentiment.
“Financial markets have begun to anticipate a rise of more than 75 basis points in the US, which has negatively impacted risk sentiment, causing the rand to weaken to R18.00/USD on significant strength of the US dollar, while the dollar has already broken parity with the euro. in August,” she says.
Markets are increasingly concerned that the Fed’s tone will become even more aggressive, with the feared external chance of a 100 basis point increase, she said.
“The decision on US monetary policy … will guide the decision on South Africa’s interest rates at the Monetary Policy Committee meeting on September 22. South Africa is not expected to rise more than the US, and this also adds to the weakness of the rand.”
Bishop said the upcoming Fed meeting would be critical in determining the future of the market, as markets hoped lower rate hikes would take place in the US in the fourth quarter.
“However, global financial markets are starting to re-evaluate their expectations, increasing uncertainty, negatively impacting risky assets as risk aversion increases. Volatility in emerging market currencies has increased over the past week.”
A reduction in the Fed’s hawkishness would somewhat reduce the risk-off environment, Bishop said, while more hawkish communication would increase risk aversion and further weaken risk assets.
Against major currencies on Monday, the rand traded at the following levels:
- ZAR/USD: R17.77
- ZAR/EUR: R17.75
- ZAR/GBP: R20.22
Read: What to expect from South Africa’s rate hike this week