Rand weakens on hawkish Fed news
The rand was a victim of the stronger dollar on Wednesday as the greenback rebounded on a decidedly hawkish message from US Federal Reserve chairwoman Janet Yellen.
The rand became a victim of the stronger dollar on Wednesday, as the greenback rebounded on a decidedly hawkish message from US Federal Reserve chairwoman Janet Yellen.
Yellen indicated that the case for a gradual pace of adjustments in interest rates was strengthening in the US despite “significant uncertainties”.
During the course of the day, the rand weakened to R13.60 to the dollar, its worst level since mid-July. This comes only a week after the Reserve Bank unexpectedly kept interest rates unchanged, warning about possible weakness in the rand.
The dollar strengthened to its best level against the euro in more than a month, hitting $1.1731 in intraday trade.
The rand’s weakness on the day was part of a general retreat in emerging market currencies, with the Turkish lira and Russian rouble losing ground to mid-year levels.
The dollar’s latest strength came thanks to a hawkish Yellen, said Rand Merchant Bank analyst John Cairns. Her speech made it clear that she supported gradual rate hikes.
Fed futures are now pricing in the likelihood of a rise in December at 76%.
Local bonds also weakened in response. The R186 was bid at 8.615%, from 8.505%, its highest level in a month. US bonds were sharply weaker, with the 10year at 2.3069%, from 2.2368%.
Foreign inflows into the local bond market have been supporting the rand of late, with the local currency firming to R12.74 on September 6.
Analysts predict more dollar strength could be in the offing.
“Despite the central bank’s expectations on interest rates, the dollar hasn’t yet recovered significantly from its lows and market pricing of rate hikes next year is far below what the dot plot indicated,” said Oanda analyst Craig Erlam.
The Fed’s dot-plot projections indicate expected further interest rate hikes, with three increases of 25 basis points likely in 2018.