As global financial markets sober up to the reality that interest rate cuts may be a longer way off than initially expected, the rand weakened to its lowest level against the dollar this year and in almost three months, hitting R19.18 at one point on Wednesday. The JSE also weakened, closing almost 2% down at 71 693 points.
Nolan Wapenaar, co-chief investment officer at Anchor Capital, said the sobering sentiments that hit the rand come as no surprise, with the market adjusting its attitude for the new year.
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Read: Emerging-market assets drop on doubts about Fed’s rate-cut path
“We came into 2024 with financial markets very optimistic on the prospect of interest rate cuts in the US. In all likelihood, [it was] too optimistic and we have seen the market back off on their expectations,” Wapenaar told Moneyweb.
“This is partly in response to comments from US Fed Governor Chris Waller that the Fed should take a cautious approach toward rate cuts,” he added.
“The reduced enthusiasm for interest rate cuts has seen the dollar strengthen to one-month highs, leading to the weaker rand outlook. We think that current levels are reasonable for the rand.”
The rand regained some ground in evening trade on Wednesday, trading at around R19.05 to the dollar just after 10pm.
Central banks in the US and SA undertook a steep hiking cycle – with the SA Reserve Bank (Sarb) proactively beginning its actions in November 2021, ahead of the US Fed which began in March 2022. Interest rates have peaked, but consumers may have to deal with high rates for longer.
According to a research note shared by Investec on Wednesday, South African consumers could see some relief in the second half of the year when the Sarb is expected to start implementing rate cuts.
“We continue to expect that SA’s interest rates will remain on hold in Q1 24 and be likely cut in H2 24, with currently only a relatively small possibility of the first cut occurring in Q2 24 [May] instead,” the note said.
Red Sea woes
Continuing conflict in the Red Sea region has reportedly also added some downward pressure on the local currency. The conflict – which has seen the attack of commercial vessels linked to Israel – has been ongoing for several weeks, disrupting global trade activity.
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“The rand started weakening already [on Tuesday] as a container ship was stuck in the Red Sea … The attacks in the Red Sea’s Bab al-Mandab Strait by Yemen’s Houthi faction [are] lifting global risk aversion, strengthening the US dollar, and so weakening the rand,” Investec chief economist Annabel Bishop noted.
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In terms of the expectations of local currency volatility in the near-term, Bishop told Moneyweb: “The rand continues to see low volatility this year to date, but is in a typically more supportive seasonal period, and still remains at risk of greater volatility as market moving data and events are quiet currently.”
A research note by Citadel’s chief economist Maarten Ackerman earlier this month painted a gloomier picture for the rand, saying it could even breach the R20/US dollar mark.
“In 2024, we expect the rand to remain under pressure, which implies that offshore investments will get the benefit of the weaker currency. Our medium-term view for the rand is that it will fluctuate between R18.50/$ and R20.50/$ with a lot of volatility,” he said.
“It may even go north of R20.50/$ if the global risk-off environment gains traction during the first half of 2024. For the rand to strengthen, South Africa needs to correct key structural issues, which we do not think will happen until late 2024,” he added.
