ZAR on the Back Foot Against the Dollar Despite Central Bank Rate Hike

ZAR on the Back Foot Against the Dollar Despite Central Bank Rate Hike

 Published: November 24th, 2021

The South African Rand (ZAR) started the week of 22nd November in a vulnerable position after recent losses chopped away at two critical resistance levels for USD/ZAR. Analysts believe that’s raised the risk of further losses for the fiat while implying possible upside for the GBP/ZAR pair.

ZAR rose more than 10 per cent against the plunging Turkish lira while moving higher against the Polish Zloty last week (wc 15th November). Still, against other developed and emerging market currencies, it faced losses as this week’s session (wc 22nd November) got underway.

The USD/ZAR rate has been on the up through much of November and climbed above its 100-week moving average of 15.6001 on 18th November. The price action seen this week leaves the rand with little in the way of support.

Analysts at Rand Merchant Bank in Pretoria said in a market analysis that ZAR seems likely to keep trading at weaker levels in the aftermath of last week’s MPC announcement on interest rates.

‘Barring any significant news, the rand looks set to trade in a range of 15.50-15.70 against the US dollar,’ the bank’s analysis states. ‘Hawkish sentiment from America’s Federal Reserve has markets assessing if the 6.1 per cent October inflation print will compel the Fed to accelerate the pace of tapering on its asset purchase programme and enable earlier rate hikes.’

Dollar gains and rand losses notched up the USD/ZAR rate to its 2021 highs last week. That also gave a complementary uplift to the pound-to-rand rate, although sterling showed little sign of reaching an equivalent peak of its own as this week’s trading session started.

The USD/ZAR price range of 15.50-15.70 Rand Merchant Bank is looking for this week, when combined with the primary pound exchange rate GBP/USD posted on Monday, suggests an indicative GBP/ZAR range of 20.8319 and 21.2348, according to its analysis.

What’s making the rand move this week?

Numerous factors have driven the rand’s price direction, including last week’s South African Reserve Bank (SARB) monetary policy decision, market response to statements from the Fed’s monetary policy committee, as well as COVID-19 related news from Europe where an uptick in cases has some countries imposing new restrictions on travel and commercial activity.

Commerzbank’s currency strategy unit said in an investor note that the rand is taking losses despite the SARB’s move to raise its key rate by 25bp, which was entirely in line with market expectations.

‘From our point of view, the negligible impact the announcement had on ZAR’s price is down to bad timing. The Turkish lira’s sudden collapse dragged down other emerging market currencies and placed strong depreciation pressure on the rand.’

The SARB decision to lift its benchmark interest rate from 3.5 per cent to 3.75 per cent was overshadowed by the lira’s dizzying plunge, which saw it hit new all-time lows after the Central Bank of the Republic of Turkey slashed its interest rate for the third time in three months.

Some analysts blame an overspill in negative EM market sentiment for some of ZAR’s heavier losses. Others have suggested a market protest is underway over the SARB’s guidance on the outlook for inflation and interest rates in South Africa. The central bank says domestic inflation pressures are still minimal, meaning it only needs to consider a gradual ramping up of interest rates in the next few years.

The broad strength of the greenback has also been an important factor, alongside ZAR’s correlation with the lira and domestic central bank policy in both South Africa and America.

Moves at US Fed are setting the tone

Three of the US Fed’s FOMC policymakers told the press last week that US inflation pressures could be pointing to a faster end to the Fed’s quantitative easing programme. That could also mean that interest rates rise sooner than America’s central bank has indicated.

Federal Reserve Board Governor Christopher Waller told Reuters that inflation data ‘are starting to look a lot more like a heavy snowfall that stays on the ground, rather than flurries that come and go. That affects my analysis of the amount of monetary accommodation required going forward.’

‘The timing of policy decisions is up to the FOMC, but from my perspective, deteriorating inflation data and the quickening pace of improvement in labour markets have pushed me towards favouring an acceleration of tapering in 2022’.

The South African economic calendar has no significant announcements for the week ahead. However, in the US, there will be a reading of the Fed’s go-to inflation measure on Wednesday, 24th November.

Forex analysts at Saxo Bank said in a market comment that they expect traders to focus on this week’s FOMC meeting, the PCE index announcement on 24th November, and any news of a change of leadership of the Federal Reserve.

Referring to the candidates to potentially replace current Fed chairman Jerome Powell, Saxo said, ‘If (current vice-chair Lael) Brainard is appointed Fed chair, markets will expect lower rates for longer.’

If the PCE inflation index reading this week points to a further rise in US inflation, that could put more upward pressure on short-term bond yields. That would also have a bearish impact on the rand as the USD/ZAR exchange rate typically tracks shorter-term US bond yields.

However, the pending announcement this week by the Biden White House on its nomination for the leadership of the Federal Reserve from February 2020 could change the picture, especially if it has an adverse impact on the dollar.

‘We’re watching to see if news of the nominee prods significant short-term volatility, though we see little difference in implications for the medium-term monetary policy,’ Saxo Bank said in its market comment.

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