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The rand takes a knock on the prospect of a US interest rate hike next month

by , 05 November 2015

This week, the rand has continued to weaken. A stronger dollar is putting hefty pressure on the local currency.

Not helping matters was US Federal Reserve chairwoman Janet Yellen's comments last night about the likelihood of an interest rate hike in the world's largest economy next month.

So why is this such bad news for the rand?

Let's take a closer look…

The dollar’s strength is bad news for the rand

The rand, along with other emerging market currencies, is under pressure as the “prospects of a US interest rate hike” next month takes its toll, says Fin24. Not helping matters yesterday was release of the Standard Bank purchasing managers’ index, which sank to “a 15-month low”.
Analysts with Barclays Research said the main cause for rand weakness is “broad-based dollar strength,” says BDLive. Yesterday, the rand put in the worst performance out of a basket of emerging market currencies, hitting a “five-week high of R13.96 to the dollar”.
The dollar benefitted from Yellen’s comments last night, which in turn punished the rand. The prospect of an interest rate hike means investors are dumping higher risk assets like the rand in favour of the dollar.
Yellen said she sees “the US economy as performing well,” and as long as economic data reflects economic growth and “firmer prices,” a rate hike next month could be “a live possibility,” reports MoneyWeb

The market is pricing in a US interest rate hike

Barclays said that looking to the futures market, its “pricing in a 55% probability of a December” interest rate hike, adds BDLive.
Tomorrow the US release revealing jobs data and the market will be waiting to see what it shows, notes the SABC. If the data for the non-farms payroll comes out on target or better than expectations, it provides more reason for a hike.
At time of writing, the rand was trading at R13.98 to the dollar, R15.21 to the euro and R21.53 to the pound.
It looks like what the US reveals in its jobs data tomorrow will give the rand further direction. If it’s good, the rand could weaken, if it’s bad, the rand should benefit.
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The rand takes a knock on the prospect of a US interest rate hike next month
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