17 Oct 2017

Rand outlook: fluctuations in global market expectations of US rate hikes, and domestic political uncertainty, continue to drive volatility

Annabel Bishop

Chief Economic

Favourable financial market conditions have assisted in the strengthening of the global economy, on still very accommodative monetary policy in advanced economies (AEs), a bull run in equity markets and low bond yields (with low market volatility).

Figure 1: Net portfolio flows for EMs

Favourable financial market conditions have assisted in the strengthening of the global economy, on still very accommodative monetary policy in advanced economies (AEs), a bull run in equity markets and low bond yields (with low market volatility). The slow pace of monetary policy normalisation in advanced economies on restrained inflation has occurred as inflation expectations have become anchored at slightly lower levels with wages and prices seen to have become less responsive to demand and supply conditions, assisted by globalization (see figure 3 and 4). Low inflation globally has also provided support for equity markets, reducing expectations of monetary tightening. The rand is particularly sensitive to any changes in market expectations of the timing and extent of US interest rate hikes. Emerging markets (EMs) have seen strong foreign portfolio inflows in the current period of global risk-on (see figure 1) with net foreign purchases of South African debt at a heady R53bn in 2017 (see figure 6). This prevented the rand from seeing the additional weakness that would normally be warranted given the high level of political uncertainty that is seen to have negatively impacted foreign holdings of SA equities, with net sales since mid-2015, of -R239bn. Despite rising global growth, South Africa’s economic growth rate remains weak, dissociated with the global economic trend, which is also having a negative impact on sentiment towards SA.

Figure 2: Exchange rate forecasts – averages for the expected case
Figure 3: Global core consumer price inflation and policy rate expectations

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