Rand Report: Rand Slides Further on Bearish Momentum

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The South African Rand had yet another week of losses in the forex market, with investor outlook suppressing the emerging market currency. Despite cooling inflation and rising interest rates , domestic economic factors continue to deter foreign investment. South African financial assets remain a poor choice in relation to comparable emerging market countries. This is courtesy of the low-growth environment and ongoing power-supply crisis.

Last week, the South African inflation data was released. The inflation rate as of April came in at 6.8%, declining from 7.1% in the previous month. The downtick exceeded the anticipated move to 7.0%. The main contributor to the softer prices was transportation and fuel costs.

This inflation reading was the lowest recorded figure in the last 11 months. However, despite inflation data moving in the right direction, price pressure remains above the SARB’s (South African Reserve Bank’s) 3% to 6% target bound. Further cooling is required to reach an acceptable level.

Producer price data was also released last week. PPI (Producer price index) remained flat over the month of April, despite expectations of a 0.5% rise. This reading comes after the 1.0% increase in producer prices during March.

South Africa’s most recent interest rate decision was released last week. SARB opted to raise its main lending rate by 50 basis points (bps), from 7.75%, to 8.25%. The rise in interest rates exceeded market expectations for a 25-bps hike, putting borrowing costs at the highest level since May 2009. However, despite the hawkish policy move, the ZAR was unable to shake off its bearish outlook which forced the further depression of the Rand.

For global data, the US FOMC (Federal Open Market Committee) meeting minutes were released last week. Fed officials expressed uncertainty around the appropriate amount of future monetary tightening, reiterating the need for continuous assessment of the country’s progress towards its 2% inflation objective. The Fed adjusted its target federal funds rate upwards, by 25 bps and the US Dollar picked up steam.

The Dollar Index (DXY) gained 0.98% last week, marking the third consecutive week of positive greenback movement. The Dollar gained 0.81% against the Pound and 0.71% on the Euro . Nevertheless, the DXY remains approximately 7.50% below the peak in October 2022.

The recent bout of US Dollar strength led the ZAR further into losing territory. The USD/ZAR pair soared another 1.15% higher last week. After kicking off at R19.42 on Monday and reaching a high of R19.85, the pair closed weekly trade at R19.65.

GBP/ZAR made a modest move to the upside, appreciating by 0.33%. The pair opened the week at R24.17 and peaked around R24.46 before ending at R24.25 on Friday.

EUR/ZAR experienced a similar price path, gaining 0.38% during the week. After restarting at R20.99 on Monday and trading higher, the pair lost steam at the R21.30 resistance level. The pair backtracked significantly and ended the week at R21.06.