The rand came under immense pressure on Monday (September 19) as the country feels the pressure of the Phase 6 load shedding and markets price in interest rate hikes from major central banks.
TreasuryOne noted on Monday that South Africa’s electricity crisis has continued to worsen, with Eskom warning of “the risk of an unprecedented level of power outages”, which will likely weigh on the local currency in the coming week.
Nedbank economists, meanwhile, said intensified power cuts over the weekend pushed the local currency to its weakest level against the U.S. dollar since August 2020.
However, despite the impact of the load shedding, the local currency is still influenced by movements in major markets in the US and UK.
Nedbank said the rand had been hit particularly hard by global headwinds – with emerging market currencies dragged lower by US inflation data released on Wednesday (September 14) which indicated the US Federal Reserve would rise aggressively its key interest rate at this week’s meeting.
“This week, all eyes will be on the US Fed policy meeting on Tuesday and Wednesday. The Fed has maintained its hawkish rhetoric over the past few weeks, with Chairman Jerome Powell saying the Fed is deliberately shifting its policy stance to a level that will be restrictive enough to bring inflation to its 2% target,” said Nedbank.
The Fed is expected to raise interest rates by 75 basis points on Wednesday. Meanwhile, the Bank of England will also hold its monetary policy meeting this week – given the upside risks to inflation, it is also expected to rise by 75 basis points.
This view was echoed by Investec’s chief economist, Isabelle Bishop, who said the rand was targeting 18.00 rand to the dollar, feeding on this negative sentiment.
“Financial markets started pricing in a more than 75 basis point rise in the US, which had a negative effect on risk sentiment, causing the rand to weaken towards 18.00 rand/USD on substantial US dollar strength, with the dollar already breaking above parity with the euro in August,” she said.
Markets are increasingly concerned that the Fed’s tone could turn even more hawkish, with the outside possibility of a 100 basis point hike dreaded, she said.
“The US monetary policy decision…will lead to South Africa’s interest rate decision at the September 22 Monetary Policy Committee meeting. South Africa is not expected to rise more than the United States, which also adds to the weakness of the rand.
Bishop said the next Fed meeting would be key in determining the market going forward as markets hoped the fourth quarter would start to see weaker U.S. rate hike moves.
“However, global financial markets are beginning to reassess their expectations, leading to increased uncertainty, negatively affecting risk assets as risk aversion increases. Emerging market currency volatility has increased relative to to last week.”
A reduction in Fed hawkishness would somewhat reduce the risk environment, Bishop said, while more hawkish communications would increase risk aversion and further weaken risky assets.
On Monday, the rand was trading at the following levels against major currencies:
- ZAR/USD: R17.77
- ZAR/EUR: R17.75
- ZAR/GBP: R20.22
Read: What to expect from South Africa’s interest rate hike this week