Rand claws back some lost ground as markets adjust to US Fed rates outlook

20 December 2018 - 12:17 By Andries Mahlangu
The South African rand staged a mild recovery on Thursday morning. Picture: REUTERS
The South African rand staged a mild recovery on Thursday morning. Picture: REUTERS

The rand staged a mild recovery on Thursday morning, signalling that market participants may have absorbed what they generally interpreted as disappointing US Federal Reserve commentary.

As anticipated, the Fed raised rates by 25 basis points on Wednesday night and forecast two more increases in 2019 instead of three previously forecast.

But US stock and currency markets fell in the immediate aftermath of the Fed's statement, as the perception prevailed that the world's most influential central bank did not go far enough, given the recent volatility in the global financial markets.

The rand retreated from highs of R14.11/$ to lows of R14.43/$ before clawing back some lost ground.

The erratic global markets are indicative of growing perceptions that the global economy could be slowing down.

"Just as the dollar responded positively to the news, the rand showed some volatility during the day. Interestingly, investors have not materially reversed their vastly reduced expectations of US rate hikes next year," said Mercato Financial Services analyst Nico du Plessis.

"However, even this was not enough to stop the dollar from recovering from its lows, which now leave emerging-market investors in a slightly more difficult position heading into the of the year."

In total, the Fed has raised rates four times in 2018. The move has a marked effect on the rand in terms of capital outflows. Foreigners have sold nearly R63bn worth of local bonds on a net basis so far in 2018, contributing to sharp rand weakness. This led to the SA Reserve Bank raising rates by 25 basis points in November.

The local central bank cited the effect of a weaker rand on the inflation outlook, among other factors. But the continuing slide in international crude prices could counteract that effect.

Brent crude hovered at $56 a barrel, its lowest level since October 2017, according to Iress data. Oil prices are reeling from oversupply and global growth concerns.

At 9.31am, the rand was 0.50% stronger against the dollar at R14.3150/$, 0.14% better against the euro at R16.3473/€ and 0.11% better against the pound at R18.1246/£. The euro was 0.36% stronger against the dollar at $1.1420.

Local bonds were little changed, with the yield on the benchmark R186 rising to 9.08%, from 9.07% at its last settlement.