Cape Town – The rand has recovered the losses it incurred since the start of the year, after dramatically low oil prices and a rout in the Chinese markets rocked the local economy.
After closing at R15.46/$ on Wednesday evening, the rand fluctuated between that figure and R15.49 on Thursday morning.
This comes off higher than expected inflation figures of 6.2% released on Wednesday, which proved that the SA Reserve Bank was correct in its 50 basis-point hike and that more will follow, according to independent treasury specialist to corporates, Adam Phillips of Umkhulu Consulting, on Thursday.
The consumer price index accelerated to 6.2% year-on-year (y/y) from 5.2% in December, largely due to transport and drought-infused food price inflation, said Rand Merchant Bank economist Isaah Mhlanga in a note on Thursday.
“Ordinarily, high inflation should lead to a weaker currency,” he said. “However, expected interest rate hikes following above-target and above-consensus inflation pushed USD/ZAR by 1.7% to its strongest level of 15.48 since the beginning of January.
“The bigger positive for the rand is the market’s perception that the Fed will back off from its policy path given its concerns about global growth,” he said. “Risk is on as global equity markets and emerging market currencies rallied yesterday and are likely to continue today. The rand is likely to remain on a gaining bias in today’s trade.”
The US Fed released the minutes for the January meeting on Wednesday, showing a dovish tone as well as caution about jumping to conclusions about the market volatility this year and what it might mean for US monetary policy, said Standard Bank economists Shireen Darmalingam and Walter de Wet on Thursday.
“The minutes indicate that most members argued for a wait-and-see approach, arguing that more data on the strength of the US economy, inflation and labour would be prudent before deciding on monetary policy moves,” they said.
They said the rand “put in the best performance (on Wednesday) amongst the commodity currencies” it evaluates.
As South Africa counts down to the crucial budget address by Finance Minister Pravin Gordhan next week, economists see the rand showing “trickle moves”.
The positive move in the rand “has nothing to do with (President Jacob) Zuma and I think only 'trickle moves' could happen in front of Gordhan's speech,” said Phillips.
Darmalingam and De Wet agreed: “While we believe the rand may move closer to R15.00 still, we note that ahead of the budget next week, with the rand at R15.48 this morning, upside may have become a bit compressed.”
Another positive on Wednesday was a Statistics SA announcement that growth in retail sales came in at 4.1% y/y in December, higher than Standard Bank’s 3.5% prediction. “Looking into 2016, we believe that rising interest rates and inflation alongside reduced confidence levels will likely be negative for retail sales,” they said.
Phillips also agreed that a further rate hike “should slow this down”.