In the wake of the US Federal Reserve’s 50-point interest rate hike – the most significant move in years – TreasuryONE strategist Andre Cilliers provides context on the recent volatility of the rand and offers guidance to SA importers and exporters on levels at which they should cover their risks. In this interview with BizNews editor Alec Hogg, Cilliers shares the advice he is offering to clients right now and explains why the forex markets are currently all about US dollar strength.
On the rand’s rally as the Fed pushes back on 50 basis-point hike
When it started running up, first of all, we know the Ukraine war had a dramatic impact; especially on the European economy and its serious dependency on gas and oil from Russia and the impact of sanctions on the industries. Secondly, we are faced with higher interest rates and we had a 50-basis point move in the US last night. We also know the Covid-19 situation in China led to the closure of harbours; ships are lining up in front of harbours, unable to offload their cargo. That creates a problem with shipping and with all sorts of things. On the back of that, there were the KwaZulu-Natal floods, in the Durban harbour that impacted severely on our economy and the flow of goods. Hence, there has been extreme volatility. For instance, last night after the announcement of a 50-point increase in the US, it led to a rand all the way down to 15.43 this morning. That is quite a move. At the beginning of this week, we started around the 16.10 level, all the way down to 15.43, and now we’re already back up at 67. It’s simple. The market is slightly disappointed with what happened by the Federal Reserve, not because of the move for 50 basis points – that was expected and was priced into the market – but in the outcome and the press conference by the Federal Reserve president. He clearly suggested they will not really look at 75 basis point increases. The market is an interesting place. They are still disappointed with inflation on the elevated level. They want the Federal Reserve to step up its aggressiveness in terms of interest rates. But it was kind of expected that if the market is slightly disappointed with that speech, it might pull back a little on the euro and see a strengthening of the rand. And that is exactly what happened.
On dollar strength and the vulnerability of the euro area economy
If we look around, it’s dollar strength. It is no wonder the dollar is the only asset class that has gained. If you look at the euro/rand, for instance, then the average rate of the euro/rand between July and December of last year was 17.34, while the average rate for the dollar/rand was 14.88. If you look at where the rand is trading currently, it is weaker against the dollar because it is trading around 15.67 at this point. But the euro/rand is much stronger. It’s trading around the 16.55, 16.56 levels while last year in that same period, July to December, it was up at 17.34. That simply tells you this whole thing is a move of the dollar and not a weakness of the rand. That is the dollar performing and is all on the back of interest rates.
Where to next? Well, it’s quite simple. We have to track the dollar. The dollar index is trading at 20-year highs. So, in my opinion, slightly overvalued. But as long as the war continues in Europe, its economy is very dependent on what happens. They’re also very jittery this might escalate the possibility of dragging in the rest of Europe. This makes the European economy very vulnerable. And as long as the UK depends on Europe, it is also vulnerable. So that continues to weigh on the strength of those currencies, adds to their weakness and strengthens the US dollar.
On whether the rand will be affected by the dollar strength
If we consider all the factors locally, then the rand is in quite a good position. If you look at the Russian-Ukraine war geographically, we are far removed from that. Our dependency on the Russian economy in terms of our total trade with them is limited. In terms of the movement of the currency, last week on Friday, the rand was up at the 16.00 level. We ended up back down at 15.75 on Monday when the volatility and liquidity were low. We had seen a trading up, but on Tuesday when we opened and liquidity came back, that strengthened. Last night, there was that same resilience from the rand. We are still one of the bankable emerging markets and should be cautious to just call it a weakness of the currency. I think that resilience will continue. We might see slight weakness if the dollar moves a lot against the euro and it breaks below 105. We could see the rand moving up closer above the 16.10, 16.20 levels again. But the resilience will remain and any retracement of movement on the dollar and the rand will move back down to stronger levels. If I say lower, I speak in terms of numbers, in other words, a stronger rand. We can put the rand into a trading range of 15.50 to 16.50 as a very, very wide one based on the factors I’ve mentioned. However, it will most probably retrace, closer to the 15.50 levels and end off the year with an average of around 15.30 to 15.50 levels. I will not be surprised if we do see it at 15.00 or slightly below 15 within the next couple of months.
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