Johannesburg - The rand hit new record lows yesterday as the prospects of a US rate hike hardened, a development that helped push stocks higher as money flowed into rand hedges such as the gold sector.
By 7.15pm, the rand had slipped 1.1 percent to R14.319 to the dollar, after touching a new record low of 14.3303, as the stronger-than-expected jobs data in the world’s biggest economy continued to reverberate through the markets. The rand yesterday also fell to its weakest level against the UK pound of R21.6695.
The rand, along with its emerging market peers, was still weak against the greenback, post US non-farm payroll data released on Friday, showing employers in the US added 271 000 jobs in October, the most in 10 months.
“If you think that R14.20 is expensive, hold on to your seats because you’re going to see much worse in the coming months for the rand,” Bidvest Bank chief dealer Ion de Vleeschauwer said.
Weaken
Barclays Africa changed its outlook on the rand to weaken 2 percent against the dollar to R14.80. The bank’s technical strategist Judy Padayachee changed her medium-term outlook on the rand to R14.80 to the dollar, from the previous target of R14.50.
Citi recommended selling the rand to target R14.85 to the dollar.
Emerging market currencies and stocks fell to five-week lows as jobs data bolstered the case for the Federal Reserve to start raising interest rates, fanning concern capital outflows from developing countries will worsen as economic growth languishes.
Meanwhile, economists forecast yesterday that the Reserve Bank would not hike interest rates when its monetary policy committee (MPC) meets next week. The base case is still for a January hike.
John Cairns, a currency strategist at Rand Merchant Bank, said the dovish undertone in official Reserve Bank rhetoric and the downplaying of pre-emptive policy action tipped the scales towards a hold on rates next week. “The concern is that the rand changes tone and starts to panic over a December Fed hike, which could leave the Reserve Bank chasing the rand again in the first quarter of 2016.” He continued: “Our base case is still for a January hike, but should the rand depreciation accelerate sharply over the next week, then the MPC could feel the pressure to hike.”
Lesetja Kganyago, the governor of the Reserve Bank, has repeatedly stated the MPC “stands ready to act”, but is very cognisant of the output gap. Moreover, inflation is set to be below 5 percent until the end of November. Manufacturing output numbers are out today and mining production figures will be released on Thursday.
Consensus is for manufacturing production growth to have fallen deeper into negative territory by 2.5 percent year on year in September, compared with a softer decline of an annualised -0.2 percent in August.
Declined
Mining production growth is expected to have also declined by 0.2 percent year on year from positive growth of annualised 3.8 percent in August.
Annabel Bishop, the chief economist at Investec, said she believed the Reserve Bank would not hike interest rates again in 2015, with economic growth collapsing towards 1 percent year on year and a credit rating downgrade looming from Fitch, and possible revisions from stable to negative outlook from Standard & Poor’s.
“South Africa cannot afford much higher interest rates in 2016 either,” she said.
“While South Africa could avoid recession in the third quarter, it will be close, with the vehicle sales figures indicating reduced consumer affordability. Higher interest rates and taxes, both signalled by relevant authorities, will suppress future economic growth, risking credit downgrades as fiscal consolidation is delayed.”
* Additional reporting by Bloomberg and Reuters
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