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The rand faces pressure in the run up to the Fed's interest rate decision

by , 26 October 2015
The rand faces pressure in the run up to the Fed's interest rate decision
After depreciating sharply following the medium-term budget, the rand has settled down somewhat.

Whilst the rand reacted positively to the Chinese central bank reducing interest rates again, the main focus for the week is the outcome of the Federal Open Market Committee (FOMC) meeting in the US.

A rate hike in the US could be bad news for the rand.

Let's take a closer look at what's going on…

The rand benefitted from a rate hike in China

This morning, the rand was slightly firmer after hitting “three week lows” last week, reports Fin24. Helping the local unit is “improved risk sentiment after China cut rates for the fifth time” this year in a bid to boost its economy.

The People’s Bank of China “cut interest rates” on Friday and brought down the “amount of cash banks must hold as reserves,” says IOL. This helped boost emerging currencies, including the rand.

Whilst this may be good news, analysts with NKC African Economics question whether this will actually “make a difference to demand for local resources,” adds IOL.

Just last week alone, the rand fell 3.6% to the dollar, notes Bloomberg.

Have a look at the chart below of the dollar/rand over the past 12 months…

Chart of the dollar/rand

On Friday, the rand hit its worst level in nearly three weeks after the release of manufacturing data out of the US, adds Fin24. The positive data “put bets of a rate hike there back on the table”.

Will interest rates rise in the US this week?

The market will be waiting intently for the outcome of the Fed’s two day FOMC meeting on Wednesday, notes BDLive. The overall consensus is that the committee will keeps rates unchanged, “but a surprise is still possible”.

Then on Friday, sees release of the trade balance in SA, which could also pressure the rand, says BDLive.

Nedbank Group’s head of strategic research, Mohammed Nalla, told Bloomberg that “the longer-term trend remains toward further weakness” for the South African currency.

At the time of writing, the rand was trading at R13.68, R15.10 to the euro and R20.98 to the pound.

So the rand is still far from out of the woods yet. Expect Wednesday to give the currency further direction.

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The rand faces pressure in the run up to the Fed's interest rate decision
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