The Rand sinks as US Fed rate hike looks near

(Bloomberg) – The rand fell to its weakest in almost 14 years on speculation that the US Federal Reserve will raise interest rates next month. This would immediately have the knock-on effect of dimming the appeal of all emerging-market assets, and could see the SA currency dip to levels not seen since December 2001. The American central bank’s plans hinge on a variety of factors – including internal growth and trade prospects with nations such as China.

The indications of a rise saw the rand fall with currencies such as South Korea’s won and Malaysia’s ringgit. The most declarative statement of the Fed’s intentions came after Fed Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that it would take a significant deterioration in US economic data to convince him to put off increasing rates in September.

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USD/ZAR 3 month graph

The SA units 9.6 percent slide against the dollar this year underlines the challenges faced by President Jacob Zuma’s administration in reigniting investment and growth in an economy struggling with 25 percent unemployment. Mining companies plan to cut as many as 10,000 jobs to cope with higher costs and lower prices for their output amid a strengthening dollar – and this has added a further shock to the commodities market.

There is now “little doubt about a US hike”, Mohammed Nalla, head of strategist research at Nedbank Group, said in a note to clients on Wednesday. “This combined with a plethora of negative headlines regarding the local economy are unlikely to provide any comfort for the rand.” Yields on government rand-denominated bonds due December 2026 jumped 4 basis points to 8.25 percent.

Investors are focused on US monthly payroll data due on Friday as the Fed mulls whether to raise the near-zero interest rates that have buoyed demand for riskier assets. “The rand’s sensitivity to Fed stimulus has ensured we have remained bears,” Christopher Shiells, a senior emerging-markets analyst at Informa Global Markets in London, said in e-mailed comments. The currency will weaken to 13 per dollar once it breaks through 12.866, he said.

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