On Monday (5 January 2024), the rand took a hit, slipping back to R19 against the dollar as markets reacted unfavorably to signs indicating that interest rates might stay elevated for a longer duration than previously expected.
The US Federal Reserve has dashed hopes for an early interest rate reduction, with Chair Jerome Powell cautioning against premature action until the objective of higher interest rates is achieved.
According to Investec’s chief economist Annabel Bishop, this stance has indicated to the markets that the initial rate cuts in the US are likely to occur later in the year, leaving emerging markets, such as South Africa, lagging behind.
Market sentiment has shifted, with the likelihood of an early interest rate cut in the US diminishing as the year progresses. Previously seen as a certainty in early January, the probability of a rate cut in May is now down to 69%.
Expectations for a 25 basis points cut in March, once at 87%, have plummeted to a mere 17%, with markets now foreseeing a 100% chance of a US rate cut only in June.
“This delay in the timing of the initial US interest rate cuts has significantly impacted financial market expectations, leading to a weakening of emerging market currencies across the board,” Bishop remarked.
Historically, the rand has exhibited substantial strength during US interest rate cut cycles and weakness during hike cycles, given its high liquidity and robust trading markets, making it a risk proxy.
In alignment with the Fed’s stance, the South African Reserve Bank is unlikely to adjust its interest rates in March or even May 2024, with a potential cut anticipated shortly after the US rate adjustment in July 2024.
Meanwhile, the rand continues to display weakness, hovering around the R19.00/USD mark, and could potentially depreciate further from its fair value of approximately R15.00/USD.
Source: Bussinestech
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