Rand weakens as investors assess Fed rate hike

And as commodity prices such as gold weakened.
Image: Waldo Swiegers/Bloomberg

The rand weakened in early trade on Friday, as investors assessed the impact of the start of the US Federal Reserve’s rate tightening cycle this week and as commodity prices such as gold weakened.

At 0741 GMT, the rand traded at R14.94 against the dollar, 0.23% weaker than its New York close of R14.90 on Thursday.

The Federal Reserve on Wednesday raised interest rates for the first time since 2018 and laid out an aggressive plan to push borrowing costs to restrictive levels next year in a pivot from battling the pandemic to countering the economic risks posed by excessive inflation and the war in Ukraine.

Riskier currencies, such as the rand, thrive on US interest rates remaining low because they benefit from the interest rate differential that increases their appeal for carry trade.

“The rhetoric from (Fed) Chair Powell and his reference to the labour market being tight to an unhealthy level further support the view that the rate of increases this year will be substantial,” Craig Erlam, Senior Market Analyst at OANDA said in a note.

“Now it’s just a question of whether the Fed’s actions, combined with moves in commodity markets, will become recessionary, something the markets may be starting to price in.”

As South Africa is a resource-led country, recent rises in commodity prices, especially gold, platinum and coal, had strengthened the currency, even though investors rush to the safe haven dollar during uncertain times.

But on Friday gold prices fell and were on track for their worst week since late November, as safe-haven demand fuelled by Russia’s invasion of Ukraine subsided.

On the stock market, the Johannesburg All-Share index rose 0.64% to 74,601 points, while the Top 40 index climbed 0.91% to 68,185 points.

In fixed income, the yield on the benchmark 2030 government bond was up 8 basis points to 9.665%, reflecting weaker prices.

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