The rand on Thursday breached the key R17.50 to the dollar mark after the US rate cut of 50 basis points (bps), which was greater-than-expected and the jumbo cut the market had been looking for.
The Federal Open Market Committee (FOMC) cut the federal funds target rate by 0.5% to to the range of 4.75%-5%% on Wednesday night, on “progress on inflation and the balance of risks” as the FOMC’s inflation forecasts fell and unemployment rate projections rose.
Annabel Bishop, the chief economist at Investec, said: “The markets had not factored in a -50bp cut and the Bloomberg economic consensus was also for a -25bp cut. Consequently, the bigger-than-expected drop in the fed funds rate caused EM (emerging market) currency strength, with the rand reaching R17.46 to the dollar.”
By 10.39am on Thursday, the rand was 0.23% higher at R17.46 to the dollar.
The rand has been volatile as financial market expectations has shifted on the timing and speed of the anticipated US interest rate cuts, at R18.23 to the dollar in January, reaching R19.39 in February, and dipping above and below R19.00 in the first half or 2024, she said.
For South Africa, Bishop said , the markets had only factored in a -25bp cut later on Thursday as the Monetary Policy Committee meeting makes its rate decision, which is the Bloomberg economic consensus too. The rand has strengthened on the widened interest rate differential and could gain further.
The FOMC’s projection for the unemployment rate this year rose to 4.4%, from the forecast of 4.0% made in June, which showed a significant jump.
Bishop said this likely drove the bigger-than-expected interest rate cut as inflation forecasts improved.
US Federal Reserve chair Jerome Powell said the cut “reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.”
The US Federal Reserve Bank’s gross domestic product growth projections were left unchanged for the period 2025 onwards at 2.0% year on year (y/y), and for 2024 the projection was also 2.0% y/y for economic growth, marginally revised down from 2.1% y/y.
"With the Fed showing no concerns about recession, and placing a large buffer in place by cutting its rate by -50bp late yesterday, the markets have seen the outcome as positive. For November another -25bp cut is expected in the US,“ Bishop said.
Neil Wilson, the chief market analyst for Markets.com, said, “The Fed cut by 50bps...which was the jumbo cut the market had been looking for. It’s the first cut in four years and marks a major turning point in this incredible economic cycle that still defies expectations.”
He said the Fed was definitely leaning on the jobs side of the dual mandate. This implied another 50bps this year and it suggested concern that they are seeing signs the unemployment rate could accelerate higher in the coming months.
“The concern, however, is that with Powell giving it up so easily on the first date the market will get what it wants but be left unsatisfied ultimately. And with financial conditions already super-loose, was it really necessary to give away the farm so soon…surely a longer courtship and teasing of future cuts would have sufficed?,” he added
Wilson further said, “Market reaction is clear so far – stocks jumped, gold jumped, yields fell and the dollar dipped hard. But the knee-jerk could unwind on Powell’s presser, but on the whole markets think this is a step towards safeguarding the soft landing…”
Sebastian Mullins, the head of Multi-Asset and Fixed Income at Schroders, Australia, said, “We were expecting a 25bps cut so this is more dovish than we expected.”
He added that if the Fed continued to cut aggressively with 50bps increments, this could give the market the wrong impression that growth was weaker than expected. If the Fed was too aggressive in its rate cuts, it could lead to a policy mistake which in turn could result in inflation rearing its head once again. This could surprise the market negatively.
“For EM the weaker US dollar would be welcomed, and it can allow central banks to follow in their footsteps. Albeit not to the same degree as 50bps, in SA more likely 25bps increments,” Mullins said.
BUSINESS REPORT