The South African rand remained firm against major currencies just before noon on Wednesday after the market shrugged off better-than-expected producer inflation (PPI) data. Currency traders said that while the rand was looking to firm, it had been unable to do so after the market had been caught short of dollars.
At 1150, the rand was trading at 7,7400 to the dollar from a New York close of 7,606. It was a little firmer against the euro at 8,9138 from a previous 8,9298. The rand was quoted at 12,8868 against sterling from Tuesday’s close of 12,9102.
The euro was quoted at $1,1518 from $1,1515 late on Tuesday in New York, while gold was quoted at $348,13 an ounce from a close of $347,38.
“We have had PPI coming out, but the rand hasn’t moved. It should go lower [firmer], but the market seems to be a bit short dollars at the moment,” a currency trader said.
The rand rallied strongly on Tuesday on the back of comments by South African Reserve Bank (SARB) governor Tito Mboweni that he favoured a stronger rand.
“Of course the SARB wants to see a much stronger rand than current levels because of the pass-through effect on inflation — in general central banks would prefer a stronger rand,” Mboweni told Parliament’s Portfolio Committee on Finance.
South African producer prices for all commodities rose 1,1% in the 12 months to end May from 3,3% for the 12 months to end April, Statistics South Africa said on Wednesday. On the month, they were down 1,3% in May on an actual unadjusted basis, from -0,1% in April.
The May producer inflation rate was expected to be a median increase of 2,6% y/y, according to an I-Net Bridge survey of private sector economists. The range of forecasts was very narrow – from 2,5% y/y to 2,7% y/y.
Traders expect the rand to trade between 7,73 and 7,80 to the dollar in the short term.
The market’s attention now turns to the US Federal Open Market Committee’s decision on interest rates to be announced Wednesday evening.
According to Dow Jones Newswires, should the Fed opt for a 25 basis-point cut and couple it with language suggesting economic conditions are improving, the dollar could rally substantially, some analysts say. Conversely, a deeper, 50 basis-point cut could be interpreted as indicative of desperation among US monetary officials, thereby stifling the emergence of positive dollar sentiment, one trader said.
It would also kick much wider the already substantial differential between US interest rates and those in much of the rest of the world, something that has long pushed investors out of dollar-denominated assets towards higher-yielding destinations abroad.
Favourable interest rate differentials and the related carry trade are widely regarded as a reason for the rand’s strength in recent months.
Nevertheless, the rand surprised many pundits by firming after the SARB cut the
repo rate by 150 basis points on June 12. – I-Net Bridge