If not a bath, the rand takes a cold shower
Local currency hit by rising oil price and stronger dollar
The rand fell to its lowest level against the dollar since the middle of January on Monday as inflationary concerns pummelled US bonds, with the dollar firming in response.
The rand fell to R12.28/$ in morning trade, before recovering marginally in the evening. The rand’s fall was in tandem with that of other emerging-market currencies, which all suffered due to the stronger greenback, including the Russian rouble and Turkish lira.
The catalyst for the rand’s weakness was a sharp spike in the yields of the US 10-year treasury, the world’s most-watched bond, to 2.9962%, amid surging oil prices. Brent crude briefly rose to $74 a barrel, its best level in three years.TreasuryOne analyst Andre Botha said the increase in oil prices had sent a bit of a shudder through the market as it increased the possibility that inflation could go higher.
“This has sent the US treasury yields close to 3% and will place some pressure on the Fed when they have their next meeting on interest rates,” he said. (Bond prices fall as their yields rise.)
Nedbank analysts expect the rand to weaken in the coming months. “Our 12-month targets range between R12.40/$ and R13/$.”
US equities have performed relatively well of late amid upbeat company results, despite the Fed’s tightening.
Rising bond yields had important consequences for equities as higher interest rates meant higher borrowing costs for corporations, said FXTM analyst Hussein Sayed. “Another sharp spike would eat away a significant element of their profitability by increasing interest expense.”
Many consumers would find their disposable incoming falling, as they have to pay more for their property mortgages.
“So, unless the growth in the economy, wages and companies’ profitability offsets the rise in interest rates, there may be bad times ahead, especially for equities,” he said.