Rand trades higher on positive US Federal Reserve sentiment

Rand trades higher on positive US Federal Reserve sentiment

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THE RAND traded higher yesterday after starting the week on the back foot an avowed US Federal Reserve decision not to raise rates too quickly despite inflationary pressures

The rand struggled this week as concerns about the third wave of Covid-19 cases and possible stricter lockdown measures mounted in South Africa.

However, yesterday, the rand gained 0.17 percent to R14.19 against the dollar by 5pm amid a softer greenback, in spite of consumer price inflation in South Africa rising by 5.2 percent year-on-year in May.

This was the first time inflation has gone above the midpoint of the target band since February 2020 and the first time inflation has exceeded 5 percent since November 2018.

The rand begun paring losses on Tuesday after the US Federal Reserve chair Jerome Powell vowed not to raise rates too quickly. Powell reiterated his view that the recent jump in inflation would prove transitory. The rand rose as commodity prices retained support, underpinning the commodity nature of the domestic currency.

Commodities bounced back yesterday as a softer dollar brought some relief while global economic recovery continued, which also provided some underpin for the rand.

Gold rose more than 0.7 percent to $1 787 while platinum was 4 percent higher at $1 084 and palladium rose 2 percent to $206 per ounce.

Brent crude prices continued to rise to hit a two-year high of $75.80 a barrel, buoyed by a bigger-than-expected slump in US crude inventories and supply concerns.

Investec chief economist Annabel Bishop said most key commodities necessary for the global supply chain had retained strong price levels.

Bishop said industrial commodity prices reflected the ongoing supply chain pressures on strong economic recoveries around the world.

“In particular, the rand is very heavily influenced by metals prices, as well as foreign investor portfolio flows and market risk sentiment,” Bishop said.

“High commodity prices have been feeding through into inflationary pressures globally, although this has been driven in particular by energy and food,” Bishop added.

The effect of the lockdown in South Africa has resulted in a period of low inflation and a low base in subsequent calculation periods.

With the rise in inflation over the past two months, economists have warned of the first interest rate hike before the end of the year.

Sanlam Investments chief economist Arthur Kamp said the more important question was whether the jump was temporary or more durable against the backdrop of upside surprises in global inflation.

Kamp said global supply chains were still disrupted amid high shipping costs, longer delivery times and lower inventory levels.

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