Rand has best November in 30 years as US Fed turns dovish
Trump’s disappointing election results and a more dovish tone from the US Federal Reserve have seen emerging-market currencies benefit
The rand, which suffered more than most from a collapse in emerging-market currencies earlier in 2018, is on track for its best November against the dollar in 30 years, and may be set for more support from a hawkish Reserve Bank.
The rand has weakened in November in seven of the last 10 years, according to data compiled by Bloomberg. The gain of 8.1% this month is surpassed only by the 9.1% advance in November 1988.
The rand's gain this month is the biggest among major currencies tracked by Bloomberg, and may herald more good news for consumers and motorists, who are already set for an almost R2/l drop in the petrol price in December.
The currency, which is still down more than 9% to the dollar this year, got a boost after the Bank raised the repo rate on November 22 for the first time since 2016, boosting it by 25 basis points to 6.75%. While the inflation outlook improved since the September meeting, the monetary policy committee (MPC) expressed skepticism that this would last and chose to highlight longer term risks.
While inflation is within the 3% to 6% target, governor Lesetja Kganyago and other members of the monetary policy committee have emphasised they prefer the rate closer to the mid point of 4.5%, meaning more rate hikes, which boost the appeal of holding assets denominated in the local currency, could be in store next year.
“Inflation may have surprised on the downside because it’s below the Reserve Bank and the market’s forecasts, but it is on an upward trajectory,” Kganyago said at a function on Thursday.
On Thursday, the rand had gained 0.93% to R13.6499/$ by 7pm. For the month, it jumped 7.92% against the pound to R17.4579, and 7.69% to the euro at R15.5441.
Investec said its baseline case was for the currency to average R13.97/$ in the fourth quarter, and R13.30 in the first three months of 2019. In September, it slumped to a more than two-year low of R15.70, with the best level reached during that month being R14.
While the decision to raise interest rates was a close one, with the six-member MPC initially tied, the main differences were more about timing rather than whether higher rates were needed, Fundi Tshazibana, an adviser to the governor and a member of the MPC, said at the same event with editors.
Before the hike, the rand was already having a good month as mixed results in the US midterm elections reduced the chances of President Donald Trump being able to pass dollar-friendly policies such as another round of tax cuts, or escalate its trade dispute with China, one of the factors that knocked emerging-market currencies earlier in 2018.
It also got a boost from indications that the prospect of a slowdown in the US economy would prompt the Federal Reserve to slow its pace of rate increases. Higher borrowing costs in developed markets tend to draw capital away from markets that are seen as more risky, putting downward pressure on their currencies.
Federal Reserve chair Jerome Powell gave a surprisingly dovish speech on Wednesday, saying rates were “just below neutral” - implying gradual monetary policy tightening in coming months.
Correction: November 30 2018
An initial version of this article incorrectly said that the rand was on track for its best month against the dollar in 15 years. It is in fact headed for its best November in 30 years.