Reprieve for rand and consumers
The week brought some good news for the long-suffering rand and kicked off with low inflation figures and a narrowing current account deficit. But it was the cautious comments about a rate hike from the United States Federal Reserve that brought the exchange rate back from the R12 cusp on Wednesday – even if only for a moment.
The rand-dollar exchange rate broke through the R12 mark on March 6, climbed to R12.49 last week and dissipated to R12.32 on Wednesday on the back of a better than anticipated narrowing of South Africa’s notoriously wide current account deficit and the lowest inflation growth seen in four years.
But the market appeared to anticipate some signalling of an imminent rate hike following the Fed’s open market committee meeting this week. When it was not forthcoming, the rand sank to just below the R11.95 mark before climbing over the R12 threshold again.
South Africa’s growing trade imbalance has been a cause for concern, but recent figures show that the current account deficit has narrowed more than the market expected.
When the Reserve Bank released its bulletin for the fourth quarter of 2014 on Tuesday, it showed the current account deficit came in at 5.1% of gross domestic product in the fourth quarter, down from 5.8% in the third quarter.
The consumer price index (CPI), or headline inflation, grew at an annual rate of 3.9% in February compared with 4.4% in January. This is largely thanks to a 93 cents a litre cut in the petrol price owing to low global oil prices.
Market on tenterhooks
But these domestic developments provided only a little support to the rand, which, like other emerging market currencies, had been weak against the strong dollar as the market was on tenterhooks for the Fed’s latest statement. On Wednesday its chair, Janet Yellen, emphasised that a rate hike is not expected until June, and even then it will be data dependent.
“The rand started off relatively weak and ready in anticipation of what the Fed might have done,” said Nedbank chief economist Dennis Dykes. “But to be honest, the markets get themselves into a frenzy for no real reason … Local developments do make a difference in daily trade, but the overwhelming difference is what the dollar has been doing.”
The main reason for the weakness of emerging market currencies like the rand has been the dollar’s strength. It was the cautious tone of the Fed, which also remarked on the problems that dollar strength poses for exports, that swayed markets from expecting an imminent rate hike and saw the dollar dip, causing a correction in global currencies.
The rand and other currencies benefited and the MSCI emerging markets index (which measures performance in 21 emerging economies) dropped sharply too.
“It had been very unlikely the Fed would come out with a hawkish statement. The dollar has been too strong,” said Dykes. “The Fed has realised that it’s painted itself into a corner. I’m completely unsurprised by the dovish tone.”
Yellen flagged lower export growth over the past three months as being the result of the strong dollar. Although it is not a good sign for growth, this signals strength in the US economy and lower import prices have served to keep inflation down.
‘No doubt it’s going to hurt’
“US economists tend to think the US is not really affected by a strong dollar because it’s not such an open economy, but at some point this is going to hurt – there is no doubt,” said Dykes.
The South African Reserve Bank’s monetary policy committee will meet next week to make a rates decision. The bank is known to use rate hikes and cuts to keep inflation under control and within, or close to, the target band of between 3% and 6%.
Although the low oil price did help bring inflation down to 3.9% in February, core inflation – which does not consider volatile price elements such as oil – remained unchanged at 5.8%.
Because of rising global oil prices and the recent weakness of the rand, economists expect the latest inflation figures to be the last reprieve for consumers before prices begin to climb again.
March saw a petrol price hike of 96 cents a litre, which will probably prevent a further drop in CPI inflation in that month, said Investec economist Annabel Bishop.
“Additionally, a 90 cents per litre hike in the petrol price is currently being factored in for April.” This is over and above the 80 cents a litre increase in fuel levies that will be introduced in the same month, leading to a total R1.70 a litre hike – “which will end the CPI disinflation evident since the second half of 2014”, Bishop said.