South African Rand Under Pressure

The South African rand was little changed around 16.3 per USD, helped by a softer dollar and firmer precious metals prices on the back of easing oil prices. Meanwhile, traders continued to monitor central bank actions, after the Fed delivered an expected 25 bps rate hike and signalled further tightening amid persistent inflatonary pressures from the Middle East. Domestically, attentions turns to next week's inflation data and the monetary policy decision. Expectations for a SARB rate hike increased after the Fed's move, as a narrower yield differential could weigh on the rand and fuel inflationary pressures. Still, the next move remains uncertain, with the central bank facing a delicate policy decision on Sept. 23. Inflation has been rising and, aside from a brief dip in July following fuel-price cuts, remains on an upward trend, while the economy fell back into contraction in Q2. Meanwhile, inflation expectations fell in Q3, suggesting that price pressures could ease over time.

The South African rand traded around 16.3 per USD, holding close to its lowest since early August, as the US dollar's strength and still elevated oil prices outweighed support from precious metals prices. Meanwhile, risk sentiment remained fragile amid heightened hostilities in the Middle East and further advances by the Houthis. On the domestic economic front, a closely watched gauge of South African inflation expectations fell in Q3 after surging in Q2 due to the oil shock triggered by the US-Iran conflict. The data prompted investors to scale back bets on a potential 25 bps rate hike at the SARB’s Sept. 23 policy meeting. Governor Lesetja Kganyago said this month that the MPC would remain cautious in assessing the effects of policy shocks. Headline inflation eased to 4.3% in July from 5% in June, but the slowdown could prove temporary due to recent adjustments in domestic fuel prices. Meanwhile, the GDP contracted 0.2% in Q2, ending six straight quarters of growth.

The South African rand weakened to around 16.3 per USD, its lowest level since early August, pressured by a firmer US dollar and higher oil prices. Falling gold and other precious metals prices also weighed on the currency by reducing the value of key export revenues. The greenback strengthened ahead of an expected Fed rate hike as persistent inflation, worsened by the Middle East conflict, reinforced expectations for tighter US monetary policy The oil shock is especially significant for South Africa because its reliance on imported energy means higher crude prices quickly translate into a larger import bill and stronger inflationary pressures. This could keep the monetary policy tighter for longer. Although headline inflation eased to 4.3% in July from 5% in June, higher diesel prices and global oil market volatility continue to pose significant upside risks. The Q3 inflation expectations survey, due on September 16, will be a key factor in the SARB's policy decision on September 23.