Fed hike dents rand gains

Jun 14 2017 22:34

Cape Town - The rand back-tracked after breaching R12.60/$ on Wednesday, but still traded just under 1% firmer than its previous New York close as the Fed hiked interest rates despite inflation concerns late on Wednesday.

READ: Fed hikes US rates despite inflation fears

The Fed hike cancelled some of the gains the rand made earlier in the session against the US dollar on poor US economic data and as stronger-than-expected local retail sales data buoyed the local unit.

By 22:27 the rand was trading at R12.63 to the greenback from R12.56/$ earlier in the session after US CPI and retail sales came out worse than expected.

This disappointing data has placed emerging market currencies on the front foot ahead of the Federal Open Market Committee (FOMC) meeting this evening in the US, said TreasuryOne in a snap note to clients.

The rand was also aided by retail sales growth data for April which surprised to the upside, said EasyEquities in its closing market report. Annual retail sales growth accelerated to 1.5%, higher than the market’s expectation of 0.6%. The rise was driven by strong growth in ‘general dealer’ and ‘food, beverages and tobacco in specialised stores’ categories.

The stronger data improved the standing of the rand, and led to positive moves on food retailers with Shoprite [JSE:SHP] gaining 3.12% and closing at R201.11, EasyEquities wrote in its market report published on Fin24.

All the other retail categories recorded contractions, with the ‘textiles, clothing, footwear and leather goods’ down for the fourth consecutive month. 

The implication of a stronger rand is encouraging for local consumption, as general conditions in domestic spending have been weak. A stronger rand relieves inflationary pressure on prices, easing the interest rate outlook by the South African Reserve Bank, according to EasyEquities. 

Bloomberg reported that the US consumer price index in May fell 0.1% on a month-on-month basis following a 0.2% expansion in the previous month.

While the data can be volatile month to month, often depending on energy and food prices, the underlying measure of inflation has slowed to 1.7% from 2.3% in January, raising the risk that price gains will drift further from the Federal Reserve’s target, according to Bloomberg.

The decrease in the headline index was led by energy - including the biggest drop in gasoline since February 2016 - though prices also fell in apparel, airfares, communication and medical-care services.

US retail sales dropped 0.3% after a 0.4% increase in the prior month.

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