The rand began the week on better footing, dipping below the R19-mark yesterday on the back of a subdued US dollar as investors were cautiously awaiting US consumer inflation data today for clues on the potential trajectory of interest rates.
The US inflation numbers will give markets a new sense of direction, following recent resilient economic data coming out of the world’s largest economy that has further supported a cut in interest rates by the Federal Reserve (Fed).
Fed chairperson Jerome Powell recently highlighted that rate cuts were “not likely” to happen in March, adding that he could not overstate how important it was to restore price stability, by which he meant inflation is low and predictable.
This comes after the volatile domestic currency weakened to R19.15/$1 into the end of last week, sagging under the populist slant of the State of the Nation Address (Sona), which also failed to see urgent measures to reduce severe growth impediments.
TreasuryONE currency strategist Andre Cilliers said the dollar started the new week on a softer note, with most of the major Asian trading centres closed for the Lunar New Year holidays.
“Long dollar positions are being trimmed a bit as traders turn slightly cautious ahead of tomorrow’s US inflation data, while we also have a number of Fed members talking this week,” Cilliers said.
“The rand is currently on the back foot as a combination of an underwhelming Sona speech, Stage 6 load shedding, and possible political backlash from the US over SA’s stance on the Israel/Hamas conflict weighs on the currency.”
Ramaphosa’s Sona last week offered limited insights into his plans for addressing major challenges such as power cuts, prompting this change in focus.
Analysts felt that Ramaphosa’s speech was long on feel-good and short on anything new since 2024 is an election year.
There will be another Sona after the election, and the main thing from an investor point of view is that there will be broad continuity with the reform agenda.
Business Leadership SA CEO Busi Mavuso said improving the business environment was absent from the agenda in this year’s Sona.
“The president’s speech is often strong on imagination but then strong on stagnation when it comes to translating vision into reality. Ultimately, the president needs a Cabinet that shares his reform vision and is committed to its swift implementation,” Mavuso said.
“If we are to deal with our many problems, we must focus on improving the business environment. It is key to enabling companies to establish and grow. Growing companies create employment and taxable revenue that can drive real change across the country.”
Investec chief economist Annabel Bishop also said the rand was being dragged down by multiple factors and was remaining undervalued.
Bishop said what was also negative for the rand was that the political heat had increased substantially this year ahead of the national elections, as parties jockey for voter support, with polls showing widely differing results for parties as the months wear on.
“The uncertainty ahead of South Africa’s election is putting a damper on the domestic currency,” Bishop said.
“Internationally, data coming out in the US added to market expectations that the US will not cut its interest rates next month, with Fed chair Powell highlighting it’s ‘not likely’ to happen in March, and markets pushing back May expectations as well.
“The US economy continues to see growth outshine expectations, quashing concerns over recession as a ‘soft landing’ is seen as highly likely, which has reduced the chance for US rate cuts, and so has seen some further rand, and emerging markets currencies, weakness.”