FOMC flat decision but hawkish tone

21 Aug 2018

Annabel Bishop

Chief Economist

Sees the rand little changed against the USD immediately, but strengthens mildly against the crosses

  • The Fed left its funds rate unchanged last night at its Chair’s last meeting, but saw improvement in the labour market and economic activity, signalling “further, gradual” interest rate hikes as “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” 
  • Closing at R11.87/USD, R14.77/EUR and R16.88/GBP yesterday, the rand saw little movement overnight against the USD, at R11.87/USD, R14.75/EUR and R16.85/GBP currently. The rand however, saw fractional strength against the crosses, and this strength shielded it against the dollar’s minor move stronger.
  • The US dollar closed at 1.2456/EUR yesterday in SA market time, and is a touch stronger at 1.2412/EUR currently (reaching 1.2406/EUR overnight) as markets saw the FOMC statement’s tone as more hawkish than previously. However, US markets are yet to open.
  • Specifically, Yellen said “(i)nflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term”, communicating a somewhat stronger ascent expected for 2018.”  
  • At its previous FOMC meeting, the Fed said “(i)nflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term”, leading markets to consider more than three Fed hikes this year (of 25bp each).”
  • Incoming Governor, Jerome Powell, who replaces Yellen, is seen as fairly neutral on US monetary policy, neither hawkish nor dovish particularly, and his first FOMC statement will be eagerly awaited at the next meeting (March 21st 2018). The FOMC reiterated last night that its monetary policy is not unidirectional.
  • While South Africa’s Reserve Bank previously warned of potential rand weakness as the US hikes interest rates, positive sentiment towards SA, and the ZAR, persist on Cyril Ramaphosa attaining presidency of SA and the improvements he is already bringing on SOE governance and confidence levels etc.
  • SA’s MPC has signalled two further 25bp hike’s in SA’s interest rate, one this year and one next year, but it has a substantially weaker rand in these assumptions than has prevailed to date this year. If the rand remains at current levels, or strengthens further, the SARB could remove one, or both of these proposed hikes. 
  • However, the extent of SA interest rate cuts, should any materialise, are likely to be curtailed by the US interest rate cycle, which is clearly in an upwards phase. SA cannot substantially erode the differential between its interest rates and that of the US, or other key advanced economies, without resultant rand weakness on erosion of the risk premia. 
  • On the global risk aversion front, some concerns have been seen to subside, such as the worries over rising populism in Europe, the euro zone debt crises, and 2015’s commodity price implosion (see “Gold note”, 30th January 2018, website address below for the latter). However, markedly higher than expected US interest rate hikes could stimulate risk-off, and so rand weakness, with the domestic at risk as early as today.