Rand prospects are fed linked

By Cees Bruggemans

We are inclined to link Rand prospects to SA events, and when major shifts are afoot, such as in commodity export prices, the balance of payments and/or interest rates, that is a good bet. Photo illustration of South African bank notes displayed next to the American dollar notes in Johannesburg

But these areas are currently not the main driver. Instead, it is speculation about when the Fed will move, and how this will be reflected in US long-term yields and the Dollar that are moving currency values worldwide, including the Rand.

Two weeks ago, poor US jobs data threw a shadow over the US economy, with the strong US Dollar of recent months partly blamed, and speculation regarding the Fed’s first move higher again somewhat delayed. It was enough to pull the US 10-year bond yield lower and the Dollar down.

But it didn’t last. Ere long, markets started speculating again about the inherent US strength, and the rising Dollar to be expected. Over the past few days the Dollar has bounced.

The Rand has found itself doing the very opposite, at first improving to near 11.75 but when the Dollar started bouncing, the Rand  moved back over 12.00. Rand weakness was also encouraged by poor Chinese trade data throwing a shadow over many commodity and Emerging Market currencies.

There are those that claim the 1Q2015 was weak in the US for transitory reasons (weather), and that the 2Q15 & 3Q15 could be much stronger again, with the Fed looking through this noise, and not to be deflected from its interest rate raising intentions.

This would underwrite further Dollar strength going forward, and the Rand as a consequence weakening further, too, well beyond 12:$.

There are, however, those who don’t quite buy that. The stronger Dollar has done damage to companies with global exposures, and the energy price halving wasn’t only a boon for consumers, but also was a major negative for energy companies and energy-related investment.

With the rest of the world also remaining slow, it doesn’t add up to a strong US locomotive warranting continuing Dollar outperformance. A bit of relapse may be in order. This coincides with speculation about Fed moves. If after all delaying (a bit), it would reinforce market views of a more dovish, long Fed adjustment. In turn, this suggests less of a run-up in US 10-year bond yields or Dollar.

Long way of saying that instead of bouncing yet higher, the Dollar may subside yet again, not massively, but enough in pulling the Rand back below 12:$.

This is a confusing roller coaster for SA market participants, who instead of projecting our own data to determine the Rand find themselves, along with the world at large, as Fed watchers trying to foresee the next market wriggle and likely Fed trajectory.

Meanwhile, the Rand may range trade in 11.50-12.50:$ territory rather than runaway, until greater clarity can be obtained about US growth, the Fed reaction function and markets responding in both US bond and Dollar prices.

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