The rand yesterday failed to hold on to gains following the prudent Budget Speech after hopes of strengthening were dashed by the US monetary policymakers maintaining a cautious stance on the interest rate outlook.
The domestic currency had strengthened to R18.77 to the dollar on the better-than-expected Budget, but then moved closer to R19.00/$1 by 1pm following the release of the US Federal Open Market Committee (FOMC) minutes on the back of strengthening the dollar as interest rate cuts were not imminent.
The latest minutes of the FOMC meeting released yesterday revealed that the Federal Reserve (Fed) was not in a rush to cut rates, but wanted to see more evidence inflation was firmly on a path to its 2% target before lowering rates.
The majority of officials at the Fed's most recent meeting were concerned about the consequences of cutting interest rates too soon, with broad uncertainty about how long borrowing costs should remain at their current levels.
The committee also noted that rates could be reduced later this year after there was more confidence that inflation will fall, but for the time being, they will remain data-dependent and leave rates steady.
While the Budget Speech provided no surprises other than the use of the R150 billion from the contingency reserve to reduce debt, the market reaction was largely positive with the 10-year SA Treasury yield moving lower and the rand firming slightly.
The JSE All Share index was also slightly up around 73 600 points yesterday, the second consecutive session of gains as traders continued to digest the Budget Speech.
However, TreasuryONE currency strategist Andre Cilliers said the markets had taken the slightly hawkish position in stride, with the dollar little altered following the publication of the FOMC minutes.
“The rand has given up the majority of its gains since the announcement of the National Budget and is trading in the mid R18.90s,” Cilliers said.
“We may expect the market to digest the FOMC minutes more but don't expect any major movement for the time being. Similarly, if the lower dollar persists, the rand may remain stuck within its present band between R18.60-R19.20, attempting to test the R18.80 level yet again.”
The FOMC participants also noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened or supply side healing slowed more than expected.
They highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained, with markets hoping instead for some indication on when the Fed would begin cutting its interest rate.
Investec chief economist Annabel Bishop concurred that the minutes of the FOMC prompted some rand weakness, after the domestic currency strengthened earlier in the day on a better-than-expected Budget.
Bishop said the FOMC minutes were, however, not hawkish and did concede that a couple of participants pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long
“The Fed funds implied futures show no real expectations for a March cut, currently seeing a negligible 6.8% probability, while for May it is less than a third, and only by June do markets show near certainty of a 25 basis points drop being delivered,” she said.
“We expect this is when the first SA interest cut will occur as well, although SA remains likely to only make its first interest rate cut after the US has begun its interest rate cut cycle, and if US rate cuts are delayed, so will SA’s be to later in the third quarter of 2024.”
Interest rates in South Africa are expected to remain elevated at 8.25% per annum as consumer inflation lifted to 5.3% in January, from 5.1% in December, driven by the hotels and restaurants segment.
The SA Reserve Bank has said that it would not drop its policy rate until the targeted measure of inflation has reached the midpoint of 4.5%, and is expected to sustainably remain around this mark.
BUSINESS REPORT