Respite for Rand below 14 to Dollar on rate hike, “sensible” US Fed Minutes

After a month which saw the value of the South African currency depreciate from R13 to almost R14.50 against the US Dollar, the Rand improved smartly overnight. The obvious reason was a 25 basis point increase in domestic interest rates announced after the Reserve Bank’s Monetary Policy Committee meeting. But as important has been the way the US Federal Reserve has telegraphed its intentions to start hiking American interest rates soon. Washington says it is doing its best to keep market disruption to a minimum when it begins raising rates for the first time since 2006. Traders liked what they read in the Fed’s minutes – giving commodity-based currencies including the Rand a welcome boost. – Alec Hogg  

The currency's improvement to under R14 against the US Dollar is a welcome reversal for Rand-based importers.
This year to date graph from Yahoo Finance is perspective for the South African currency’s improvement to under R14 against the US Dollar. A welcome improvement, it is a blip in what has been a terrible year for the currency.

By Candice Zachariahs and Chikako Mogi

(Bloomberg) — Commodity currencies including the Australian dollar, South Africa’s rand and the Brazilian real are surging as traders focus on the potential for a gradual cycle of U.S. interest-rate increases and ignore a rout in raw material prices.

The U.S. dollar is unwinding some of the gains that sent it to a 12-year high against the currencies of its trading partners after minutes of the Federal Open Market Committee’s October meeting signaled policy makers will take a shallow path as they raise rates as early as next month for the first time since 2006.

The Aussie is poised for back-to-back weekly advances, with traders paying the smallest premium on options to protect against weakness in the currency in more than a year even as iron ore, Australia’s chief export, dropped to a four-month low.

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“Traders are pulling back from their long dollar trades for now, given speculation that the Fed’s tightening cycle may be more gradual than the market had previously priced,” said Imre Speizer, markets strategist at Westpac Banking Corp. in Auckland. “For now, the unwinding of positions built around the Fed tightening is dominating concerns about commodity weakness. I don’t think it will last.”

The Aussie traded at 71.99 U.S. cents as of 12:51 p.m. in Tokyo from 71.94 on Thursday, poised for a 1 percent advance this week. New Zealand’s dollar fetched 65.85 U.S. cents after climbing 1.5 percent to 65.66 in the previous session. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, was little changed at 1,228.21 after declining 0.7 percent on Thursday, the biggest drop since Oct. 14.

The Fed’s Trade Weighted Broad Dollar index rose 9.2 percent this year to 121.5 as of last Friday, the most recent reading. That’s a level unseen since April 2003.

Commodities Slump

The Bloomberg Commodity Index has fallen 0.8 percent this week and is down 6.5 percent so far this month. The price of iron ore has dropped 5.6 percent since Nov. 13.

The greenback has climbed against all of its 16 major peers this year as a strengthening U.S. economy underpinned speculation that the Fed will raise interest rates at a time when many peers are cutting borrowing costs or carrying out asset purchases. The likelihood of higher rates by year-end is 68 percent, futures show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Read also: SARB Governor Kganyago: We won’t defend the Rand, it’s pointless

Aussie Premium

The premium investors pay for the right to sell the Australian dollar against the greenback over contracts to buy reached 0.82 percentage points on Thursday, the least since July last year, according to one-month risk-reversal rates.

Yuji Saito, head of the foreign-exchange department at Credit Agricole SA in Tokyo, said there is no reason for commodities prices to gain. The OPEC members are unlikely to be able to raise prices while Iran faces a lift in sanctions and Chinese growth will likely be very moderate, he said. The attack in France is also expected to weigh on European growth, he said.

“There is no way these currencies will rise,” Saito said. “All it is, is the unwinding of excessive long positions in the dollar index. People want to take profits on dollar longs.”

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