ZAR Outlook Dominated by Moves at the US Fed

A continued thirst for the USD has driven the rand exchange rate complex (ZAR) lower and the outlook would suggest more-of-the-same.

This scenario owes itself to global financial flows resulting from investors opting to take money out of high-yielding financial systems like South Africa  and sending it to the US ahead of an expected interest rate raising regime.

The UK is also seen benefiting, a move that has driven the pound to rand rate onto the path towards 20.00.

The timing of when interest rate hikes will commence is key and this week will be particularly telling as the US FOMC briefs the market as to their thinking on the rate rise.

One leading SA-based analyst tells us however that the prospect of a counter-rise at the SARB could occur; such a move will introduce heavy volatility into the market.

For now though it appears the Rand remains on the defensive.

• For reference, at the time of writing the pound to Rand exchange rate (GBPZAR) is 18.4009.
• The euro to Rand exchange rate (EURZAR) is at 13.1530.
• The US dollar to Rand exchange rate (USDZAR) is at 12.4255.

Those with currency market requirements should be aware that the quotes used in this article refer to the wholesale inter-bank exchange rates. When transferring money globaly your bank offers you a rate that has significant margin added. An independent provider will however guarantee to undercut this margin, in some instances delivering 5% more FX. Learn more.

Rand Exchange Rates Under Pressure – Could Get Worse

The dollar’s strong YTD performance accelerated in March following the start of ECB QE which pummelled the euro and helped stoke global USD demand.

More importantly though the USD was bid on a strong February non-farm payrolls report.

According to John Cairns at RMB in Johannesburg the risks are high on USD/ZAR coming into a week that contains the Fed meeting and the release of local 4Q14 current account figures.

“The rand itself is skittish, with thin liquidity and big bid-offer spreads having run on Friday ahead of the dollar only to stabilise later,” says Cairns.

There are large moves on EUR/ZAR, with swings between 12.90 and 13.20, highlighting the rand’s instability.

With the rand under so much pressure, speculation has risen over the prospect of an unplanned interest rate hike at the SARB.

“We think fears are overdone given that inflation is set to drop under 4%, rand “weakness” is really just dollar strength and the weakness in the local economy,” says Cairns, “admittedly, if the rand is in free-fall next week then panic could generate a move - just as it did in January last year.”

For now we thus see the clearest risk to the ZAR’s path forward is intervention by the SARB.

What Could Cause the USD to Strengthen Even Further?

As mentioned the immediate risk to the Rand’s outlook is the US dollar and this week the US Federal Reserve will update financial markets as to their thinking over when the much-hyped interest rate increases will commence.

The FOMC could deliver a positive assessment that stresses the stronger labour market, downplays low inflation as “transitory,” and posits that rate hike decisions will be made “meeting by meeting.”

“If paired with a neutral tone to Yellen’s press conference, markets could sell off as the odds of a June rate hike are increased,” says a note ahead of the event from Bank of America Merrill Lynch Global Research.

According to analysts at BofA the removal of the “patient” language in this week’s FOMC statement will support this re-pricing of expectations and by extension the USD.

“Its removal will signal to the FX market another step towards the first hike, which will commence the policy divergence we have expected to support a USD rally,” note BofA.

This US dollar rally would come despite many suggesting the current run higher has over-extended itself.

That said, markets have been caught calling the end of the USD rally prematurely in the past, and the same could happen yet again this week.

Remember, as a general rule of thumb - when the dollar rises rand exchange rates are likely to suffer.