Rising interest rates results in persistent ZAR weakness


Recent central bank activity has led to continued weakness in the South African rand. With central banks in both the US and UK opting to raise their benchmark interest rates, investors have moved away from emerging-market currencies. Consequently, the ZAR ended in the red against all major developed-market rivals.

The main event from last week was the 75-basis-point hike in interest rates by the US Federal Reserve. Although this rise in rates was already being priced in, after a high inflation figure the previous week, the USD rallied in the lead-up to the decision.

The USD/ZAR pair moved another 0.85% higher during last week. After opening at R15.85 and soaring to a high of R16.19, the pair experienced a partial correction, before closing at R15.97 on Friday.

The EUR/ZAR pair followed a similar pattern, appreciating by 0.93% last week. After opening at R16.65 on Monday, the pair traded in a sizable band between R16.45 and 16.95, before ending the week at the R16.80 support level.

The rand was able to fend off more severe losses against the Pound, during last week’s trade, with the Bank of England’s (BoE’s) recent action leading to sterling weakness. The BoE’s 25-basis-point hike in interest rates is being perceived by the market as relatively dovish, compared with the actions of their US counterpart. Coinciding with this, the Pound shed 0.75% of its value against the USD.

Rand report: Image: Supplied.

Nevertheless, GBP/ZAR ticked upwards by 0.35% last week. After opening at R19.52 and experiencing some significant price movement, the pair settled at R19.56 on Friday.

For South African data, the SACCI business confidence and retail sales growth figures were released last week. Both business confidence and retail sales data came in lower-than-expected, with retail sales shrinking by 0.20% in April (despite the forecasted uptick of 0.50%).

This week, South African inflation rate data will be released for the month of May. Inflation is expected at 6.1% on a yearly basis, up from the previous reading of 5.9%. On a monthly basis, price pressure is expected to be recorded at 0.3%. This additional uptick in prices would certainly add to the pressure on the South African Reserve Bank to raise interest rates in the short term.

On the global front, the main data event this week is the UK inflation data, which will be released on Wednesday. Inflation is expected to increase by 9.1% (YoY) and 0.6% (MoM). Any surprise to the upside might force the BoE to raise interest rates more aggressively. Additionally, UK retail sales data will be released on Friday and is expected to decline.

After the big week it just had, the US doesn’t have much data to be released this week. US Fed Chair, Jerome Powell, will testify in front of Congress on Wednesday. He is expected to reiterate the Feds’ commitment to remain data-driven and the speed at which it will adjust policy according to the data. There is also very little data to be released from the Euro area this week, and the Euro will be most significantly influenced by geopolitical issues.

Upcoming market events

Tuesday 21 June

US: Existing home sales (May)

Wednesday 22 June

GBP: Inflation rate (May)

ZAR: Inflation rate (May)

US: Fed Chair Jerome Powell testimony

Thursday 23 June

GBP: Manufacturing PMI

US: Fed Chair Jerome Powell testimony

Friday 24 June

EUR: Inflation rate (May)

GBP: Retail sales (May)

GBP: GfK consumer confidence index (June)

US: New home sales (May)

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