Rand firms to R16,25 after Fed's first rate hike in three years

The rand is trading below R16,25 to the dollar, having recovered from a close of R16,40 after the United States Federal Reserve raised interest rates for the first time in three years.

The Federal Reserve’s decision, announced on Wednesday night, pushed the currency weaker before it found its footing. By Thursday it had clawed back the overnight loss and moved to the stronger side of R16,25.

That is the number to watch, and it is a better one than the headline move suggests. The rand has absorbed a genuine shift in global pricing and given back only part of its recent gains.

Why the Fed’s decision reaches Johannesburg

The mechanism is simple and it is not personal to South Africa. When the Federal Reserve lifts rates, a dollar deposit pays more than it did. Money that was sitting in rand assets has to earn more to justify staying, and some of it does not.

That is what happened overnight. The rand weakened, and the close at R16,40 recorded it.

What matters for anyone holding rands, earning in rands or pricing imported stock is what happens next. A weaker rand raises the cost of everything bought in dollars, from fuel to machinery to the components a factory orders from abroad. That cost arrives with a lag, and it arrives at the till.

The recovery is the story

The rand has been resilient through the war, and it was trading below R16 to the dollar earlier in September, at roughly the level it held before the conflict started. Thursday’s move puts it back within reach of that mark rather than far from it.

That is not a small thing. A currency that gives back a fraction of its gains after a major shift in US monetary policy is a currency that global investors are still willing to hold. The alternative, a sharp and disorderly fall, is what usually follows a Federal Reserve surprise in a smaller market.

It did not happen here. The rand took the hit, then recovered, and it did so without emergency measures.

What this means for the shops and the pumps

The practical effect for a household is slower to arrive than the trading screen suggests. Importers who buy in dollars will see their invoices rise if the rand settles weaker than it was earlier this month. Some of that gets passed on, some of it gets absorbed, and the split depends on the margin the business is running.

For exporters, the move runs the other way. A rand that buys fewer dollars makes South African goods cheaper abroad, which is a benefit to mines, manufacturers and farmers selling into foreign markets.

For the Reserve Bank, a rand that holds its ground takes pressure off the inflation outlook. A weaker currency feeds into fuel and food prices, and that is the channel the Monetary Policy Committee watches when it sets the repo rate.

The next data point

The second quarter GDP figures are due for release, and they will be read alongside the currency move as a test of how much strain the economy is carrying. A rand that holds below R16,25 into that release would give the Reserve Bank room it did not have on Wednesday night.

The rand’s level at the close on Thursday, and the GDP print that follows, are the two facts that will settle the question. The Federal Reserve has moved. South Africa’s currency has answered, and so far it has answered well.

Source: eNCA, Rand in recovery