Andre Botha, Senior Dealer at TreasuryONE, takes a look at the rand’s recovery last week and the market sentiment around central banks and especially the Fed this week.

Last week was quite exciting, as the rand staged a recovery on the back of an interest rate hike and the credit rating of South Africa being bumped up a notch.

Rand movers

On the international front, we saw Fed Chair Powell reiterate his stance that they will hike interest rates as high as needed to fight the inflation surge. The ECB President Christine Legarde also entered the fray by stating that interest rate hikes are on their way.

Most of the news of late and related market movements have been in anticipation of the moves Central Banks will implement to fight inflation. The MPC of the SARB hiked interest rates by 50 basis points, in a move that was mostly expected by the market. However, the reaction of the rand was fascinating, as the rand moved 15 cents stronger on the back of the hike as we expected that the hike would have been priced in the market and the market would be muted after the decision. We also saw S&P lifting South Africa’s credit rating to “positive” which helped the rand trade a little more robustly in the early part of the week.

Fed Chair Powell stated that they will react aggressively until such a point in time that they see inflation coming down in a clear and convincing way. He also said that while he expects that there could be pain in controlling inflation in the way of higher unemployment and slower economic growth, there are pathways for the pace of hikes to ease a full-blown recession.

We saw the US dollar touch the 1.04 level against the euro after the Powell speech, but since then, it has given up some of its gains.

USD / ZAR:

The slide in the US dollar has been accentuated further by ECB President Lagarde, who stated that the Eurozone would look to hike rates in June and September while also phasing out its bond-buying program. This caused the euro to flex its fatigued muscles and move to almost 1.07 against the US dollar in anticipation of the rate hikes and hawkish tone struck by the ECB.

EUR / USD:

This week, some of the momentum of last week will still be in the market – we saw the rand making full use of the weakness in the US dollar and favourable winds from the MPC and S&P, and trade all the way down to R15.65 on Monday.

However, the rand rebounded quite sharply at those levels, which gives us a good idea that any significant move stronger for the rand is likely off the table and that gains below R15.60 will be hard to come by in the short term unless the risk sentiment changes. The data and event calendar is relatively bare this week, with the most noteworthy release being the FOMC minutes on Wednesday.

The market will be looking for clues to the mindset of the Fed, and we could see the US dollar on the front foot post the release should the view of the Fed minutes stay hawkish. This could push the rand a little bit higher this week, and we could see the rand test the upper reaches of the R15.90s.

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