Renée Bonorchis And Loyiso Sibali
11 June 2008
Johannesburg — THE rand broke through the key R7,95 to the dollar level yesterday, hitting a two-month low as the dollar powered to new highs on indications that the US Federal Reserve will hike interest rates soon.
The Fed's hint comes amid growing global concern at the return of 1970s-style inflation, driven by rising fuel and food prices. The preoccupation with inflation has now superseded widespread fear of a global economic slowdown sparked by the subprime mortgage crisis late last year.
Fed chairman Ben Bernanke now says the likelihood of a severe US economic slump has diminished, while "upside risks" to inflation are forcing the Fed to be more vigilant.
Since August, when the mortgage crisis first rocked markets, the Fed has both cut rates, from 5,25% to 2%, and pumped cash into the US economy to stop any systemic risk in its tracks. At first, few thought the reforms were working, but since April there has been an uptick in US markets.
"Over the remainder of this year, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy," Bernanke said.
These statements led punters to believe the Fed may raise rates 25 basis points at its meeting in two weeks' time.
With SA poised to raise interest rates by one percentage point tomorrow, according to estimates, the rand was hit yesterday by the potential narrowing of the interest rate differential between SA and the US. If the gap between interest rates in the two countries narrows, cash may flow into the US more than into SA as investors look for good returns and low risk.
John Cairns, currency specialist at RMB, said yesterday high inflation was starting to elicit a strong response.
"Last Thursday we had the European Central Bank suggest they will hike rates in the next month or two. China raised its bank reserve requirement by a full 1% over the weekend, and overnight Bernanke said rising longer-term inflation expectations would be 'strongly resisted'. The market's response has been aggressive: Asian equities under sharp pressure and the US interest rate curve now pricing a Fed rate hike and three hikes before year end," Cairns said.
Head of fixed interest at Sanlam Investment Management Andre Roux said rising oil prices also put the rand under pressure. Brent crude yesterday hit intraday highs of more than $137 a barrel .
Roux said the South African market was "getting hammered". The JSE all share index yesterday shed more than 1% of its value to touch lows of 30765 points, commodity prices plunged and oil continued its upward march .
Asian markets also took a beating overnight, with the Hang Seng index more than 4% down.
"China's A-share index posted the biggest daily decline since February last year, as investors reacted to high oil prices, inflation and a weekend decision by the People's Bank of China to raise the reserve requirement on bank deposits by a full percentage point this month," chairman of China equities at JPMorgan Securities, Jing Ulrich, said yesterday.
Vivien Taberer, portfolio manager at Investec Asset Management, said "negative sentiment in the South African equity market as well as emerging markets" was another driver of the weaker rand. Taberer said the Bank's comments that the current account deficit would remain substantial for a long time added to negative sentiment .
The increase in risk aversion was reflected in the fact that the local stock market last week recorded net foreign sales of R438,9m as opposed to more than R5bn of purchases a week earlier.
Cairns said since the R7,88-to-the-dollar level was so tough to break on Monday, it showed there was still strong resistance, but R7,95 was now the level to break for a move to the psychologically crucial R8,00-R8,02 level. "A spike higher still can't be ruled out."
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