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Rand subdued after big US interest rate hike

The US Fed raised interest rates by a half-percentage point Wednesday night, as was expected by most commentators. It was the most significant hike in 22 years, though it dismissed the likelihood of larger hikes going forward. Photographer: Nadine Hutton, Bloomberg.

The US Fed raised interest rates by a half-percentage point Wednesday night, as was expected by most commentators. It was the most significant hike in 22 years, though it dismissed the likelihood of larger hikes going forward. Photographer: Nadine Hutton, Bloomberg.

Published May 6, 2022

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South African markets and the rand remained subdued yesterday as investors digested the US Federal Reserve's decision to raise interest rates to curb historic high inflation while striking a less hawkish tone regarding future hikes.

The US Fed raised interest rates by a half-percentage point Wednesday night, as was expected by most commentators. It was the most significant hike in 22 years, though it dismissed the likelihood of larger hikes going forward.

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The JSE All Share Index fell by 0.96 percent, dipping below 70 000 index points to 69 682 points, the lowest in more than a week, dragged down by commodity-linked stocks and Naspers.

Investec chief economist Annabel Bishop said the tone of the Fed remained hawkish, comparable to the last meeting, and did not see a marked ramp up to extreme hawkishness.

Bishop said, in South Africa, the market view was still divided between 25 basis points and 50 basis points hike at the next Monetary Policy Committee meeting later this month.

She said the SA Reserve Bank lent towards hiking interest rates by 50 basis points in March and could yet deliver a 50 basis points lift this month.

“However, the destruction of the KZN floods, and moderation in commodity prices, particularly oil since the last MPC meeting, could limit the size of the hike,” Bishop said.

“SA’s monetary policy is nevertheless likely to remain on a normalisation path, with the SARB primarily focused on inflation, seeking to ensure it returns to 4.5 percent over its forecast period.”

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Investors also had their sights fixed on manufacturing data which confirmed disappointing output for April impacted by the devastating flooding in KwaZulu-Natal and load shedding.

The S&P Global South Africa Purchasing Managers Index (PMI) fell to a four-month low of 50.3 points in April as business activity was negatively impacted by several factors, including the war in Ukraine and Covid-19 lockdowns in China.

Meanwhile, the rand lost momentum later in the day after having strengthened during earlier trade, but there was hope that it is likely to see support in the remainder of the month.

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The rand ended the day lower, easing 0.13 percent to R15.96 against the dollar amid a stronger greenback after the Federal Reserve raised interest rates and persisting concerns persisted about the impact of recent floods and rolling power cuts.

The rand’s woes have been exacerbated by domestic issues, with Eskom implementing rolling blackouts during the month and warning that the country could experience more than 100 days of load shedding during the year.

Absa Asset Management portfolio manager Cornette van Zyl said investors had gone into risk aversion mode against emerging market currencies, especially the rand, driven by commodities.

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“The rand, after initially strengthening against the dollar after the meeting, is weakening again. We are being dragged down by our platinum and precious metals sector,” van Zyl said.

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