Rand stabilising in Wake of US Fed Speech

The rand recovered some of its poise against the dollar this morning after retreating sharply overnight when the US Federal Reserve surprised global markets with a fairly hawkish policy statement. Traders awaited the latest unemployment and producer inflation numbers, and the outcome of the central bank conference on inflation targeting for a steer on whether domestic interest rates might increase next month. The rand was at R10.9470 against the dollar at 08:38, barely moved from where it ended Wednesday’s session in New York.

Government bonds weakened in early trade, with the yield for the instrument maturing in 2026 – the benchmark for the secondary market – adding 4 basis points to 7.935%. The local unit pulled back from a seven-week high of R10.8240 overnight after the Fed came out with an unexpectedly hawkish policy tone and conveyed its confidence in the US economic recovery, boosting the greenback. “Early trade today will remain dominated by reaction to the Fed. Mid-day risks come from the eurozone economic sentiment index figures,” RMB currency analyst John Cairns said.

h3. Fed Speech

The US Fed statement last night was largely upbeat on the outlook for the US economy, with the central focus on its references to a “range of labor market indicators” that were signalling a “gradually diminishing” underutilisation of slack and that the committee sees “sufficient underlying strength in the broader economy.” The Fed is still putting the emphasis on the potential for rate increases to be sooner than anticipated should growth/inflation accelerate beyond expectations. There was a pronounced spike higher on the dollar index at the time of the statement, and overnight the index is trading above three- week highs. Fed funds futures have risen as expected, but more so on the December 2015 one and are still well below their September peaks. This puts the rand in a position of vulnerability once more against the dollar. It will not require Fed rate hikes for this dollar trend to continue over the medium term, as it has strong fundamental backing from the tightening US liquidity cycle. Emerging Market (EM) currencies still exposed to a host of underlying fragilities are at risk well beyond the short- term fluctuations that are associated with the volatile Fed funds futures.

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