The rand was on the back foot in morning trade on Wednesday (21 September), as it drifted towards R18.00 to the dollar ahead of a slew of data both locally and internationally.
The local unit has declined by around 11% in 2022 to date and is heading towards levels last seen in 2020.
“It’s D-Day for the much-anticipated Fed rate announcement, with markets largely expecting a 75bps hike. Any hike above this level will see a drastic increase in risk aversion, which will bolster the dollar further,” said Bianca Botes, director at Citadel Global.
The Chinese yuan slipped to a fresh two-year low, as Chinese economic woes weigh on the currency. Meanwhile, a broad sell-off of equities continued overnight, with Wall Street taking a 1.13% dive, while US Treasury yields reached 15-year highs, Botes said.
“Today, we will also keep an eye on local CPI as a precursor to the SARB interest rate decision tomorrow.”
Botes said that markets remain volatile, putting risk assets under strain due to uncertainty and poor sentiment. The rand is fragile at R17.75/$, R17.58/€ and R20.15/£.
The most severe blackouts in South Africa’s history are also putting pressure on the local currency and has left the government struggling for ways to mitigate their impact on businesses and livelihoods, Bloomberg reported.
The duration and frequency of the outages don’t allow for batteries used as backups to be recharged, and some firms are running up huge bills buying diesel for their generators. Small businesses have been hit particularly hard.
Vodacom Group said it has spent about R2 billion on batteries over the past two years to help keep base stations running during outages, but longer and more frequent interruptions may only allow intermittent service, Bloomberg said.
Similarly, MTN Group has deployed more than 2,000 generators and thousands of batteries to keep its customers connected, but the current severity of the power cuts made charging them a challenge, it said.
Interest rates
Africa’s three biggest economies – Nigeria, South Africa and Egypt – are poised to raise interest rates this week, while policymakers in several other countries stake out different approaches to navigate inflation shocks and bring prices under control.
Topping the agenda will be the implications that weaker local currencies will have on the cost of imported goods, as aggressive rate hikes by the Federal Reserve and expectations of more to come boost the dollar, Bloomberg reported.
The repercussions of Russia’s war in Ukraine and an anticipated downturn in Europe and China, alongside emerging price pressures from extreme weather events, are also likely to be in the spotlight, it said.
Worries over unanchored inflation expectations and increased depreciation pressure on the rand will probably see the South African Reserve Bank raise its key rate for a sixth straight meeting, said Sanisha Packirisamy, an economist at Momentum Investments.
Governor Lesetja Kganyago said in a recent interview that the central bank must do whatever it takes to ensure price growth is under control and on a downward trajectory toward the 4.5% midpoint of the monetary policy committee’s inflation-targeting range. Inflation has been above 4.5% since April 2021.
All the economists polled by Bloomberg expect the MPC to raise its benchmark to 6.25% from 5.5%, in what would be the first time it hiked rates by 75 basis points at consecutive meetings. Traders are fully pricing in an increase of that magnitude but see a chance of a bigger move.
Read: Businesses in these South African metros are suffering more than in other areas