Home South African Rand holds firm as markets wait for US Fed direction

Rand holds firm as markets wait for US Fed direction

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So far, US Fed officials have indicated that more data is needed before interest rates can be cut, and the market is expecting one rate cut of 25 basis points towards the end of the year.

The rand started off Monday at R18.16 against the dollar and was 0.7% firmer to R18.08/$1 by 5pm. Picture: Henk Kruger, Independent Newspapers

By Nicola Mawson

AS THE US waits for an indication on which way the US Federal Reserve may move in terms of cutting rates from an 23-year high – stronger for longer or sooner than the recent prevailing expectation of towards the end of the year – the rand is holding steady in a narrow band.

Recently, the local currency has benefited from an investor-friendly election outcome as well as the Government of National Unity, which partially aided in a pull-back from levels of around the R19 mark to the greenback.

The rand started off the day on Monday at R18.16 against the dollar and was 0.7% firmer to R18.08/$1 by 5pm.

US Fed chairman Jerome Powell is set to testify to the Senate Banking Committee on Tuesday, followed by a House panel appearance on Wednesday.

So far, Fed officials have indicated that more data is needed before interest rates can be cut, and the market is expecting one rate cut of 25 basis points towards the end of the year.

Investec chief economist Annabel Bishop said the rand has been trading at around R18.20 to the dollar over the past few days and was expected to range around R18/$1, with its strength dependent on when the Fed starts its rate-cutting cycle.

Currently, said Bishop, market sentiment for a 25bps cut in the US on September 18 is at 81%, while she is confident of a cut in November, with markets 100% certain of a 25bps cut at the meeting on November 7.

“The rising probability for an earlier start to the US interest rate cut cycle has underpinned the rand, aiding its strength from nearer R19/dollar in the first half of June, although the majority of its strength was due to domestic political events,” she said.

Bishop pointed to the peaceful elections in South Africa as well as the successful establishment of the new administration, which calmed investor sentiment.

She added that “the government of national unity has consequently avoided a tilt to the left, with the rand losing the risk premium built in ahead of the elections, when it weakened to R19.27/dollar from R18.30/dollar at the start of the year”.

Old Mutual chief economist Johann Els also said the rand is treading water ahead of news from the Fed on rate cuts.

Els believes that the US central bank should be cutting rates based on data from inflation, job openings, consumer spending, and other items pointing to now being the right time to pull-back on interest rates.

“The US economy is now clearly slowing and will likely slip to sub-1% GDP growth during the second half of the year versus the 1.8% pace during the first six months,” he said.

“The Fed will take this into account at their next policy meeting at the end of the month. I believe these indicators – on top of clearly slowing inflation – should produce a rates cut in the US in July. The risk is that the Fed is overly cautious and waits until the September policy meeting.”

Over June, the local currency was also a significant beneficiary of improving local sentiment, overcoming a strong dollar to make it one of the best-performing major global currencies last month, as it gained 3.3 percent month on month, said Peter Little, fund manager at Anchor Capital.

Little also noted that the currency ended the first half of the year as the only major monetary measurement (besides the heavily sanctioned Russian rouble) that has strengthened against the dollar so far, as it was up 0.9%.

– BUSINESS REPORT

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