South Africa’s currency, the rand, fell back on Wednesday after a brief rally on Tuesday as investors awaited the release of the minutes of the latest Federal Reserve meeting and U.S. inflation data.
The rand traded at 19.0450 against the dollar, 0.2% weaker than its previous close, while the dollar was slightly stronger against a basket of global currencies.
The rand had gained more than 1% on Tuesday, as U.S. Treasury yields dropped and some Fed officials expressed dovish views on the outlook for monetary policy.
However, the rally lost momentum on Wednesday, as analysts said the focus would shift to the Fed minutes and the U.S. consumer price index, which could provide clues on the timing and pace of the Fed’s tapering of its bond-buying program and interest rate hikes.
The Fed minutes will be released at 2:00 p.m. EST on Tuesday, November 11, while the U.S. inflation data will be published on Thursday.
The rand is highly sensitive to shifts in global risk appetite and U.S. monetary policy, as South Africa relies on foreign capital inflows to finance its large current account deficit.
The currency is also affected by domestic factors, such as political uncertainty, weak economic growth, and high debt levels.
According to official data from Statistics South Africa, the country’s economy contracted by 1.5% in the second quarter of 2023 after growing by 4.6% in the first quarter.
The contraction was mainly due to a decline in mining and manufacturing output and the impact of civil unrest and power outages in July.
The government’s debt-to-GDP ratio rose to 81.8% in the second quarter, up from 80.3% in the first quarter, while the current account deficit widened to 3.2% of GDP, up from 2.7% in the previous quarter.
The South African Reserve Bank (SARB) has kept its benchmark interest rate unchanged at 3.5% since July 2020, citing low inflation and weak economic activity.
However, some analysts expect the central bank to start raising rates in November or early next year as inflation pressures mount and the Fed tightens its policy.
The SARB’s next monetary policy meeting is scheduled for November 18.
Despite the challenges facing the rand and the economy, some experts remain optimistic about South Africa’s prospects.
They point to the country’s successful vaccination campaign, which has administered over 40 million doses of COVID-19 vaccines, and its potential to benefit from rising global demand for commodities and green energy.
They also note that South Africa has a resilient and diverse private sector, a vibrant civil society, and a strong judiciary that can help overcome its difficulties and foster growth and development.
Source: Reuters
