Rand Takes Hit as US Rate Hike Expectations Rise

The South African rand has come under pressure after US Federal Reserve Chairman Kevin Warsh's comments on interest rates. The rand was trading at around R16.16 by mid-morning on Tuesday, having weakened after Warsh's speech raised expectations of a US interest rate hike.

Investec chief economist Annabel Bishop said the rand weakened from below the R16 mark to R16.19 on Friday as markets initially interpreted Warsh's comments as hawkish, before recovering to R16.12 on Monday afternoon.

Bishop noted that the probability of a 0.25 percentage point US rate hike in September initially jumped to 61% from 43%, strengthening expectations of higher rates across the spectrum. However, she said markets subsequently digested the speech and viewed it as less hawkish than their initial reaction suggested.

Warsh emphasized that 'inflation expectations... right now... are well anchored. But they must be closely monitored.' He also noted that medium-term measures of inflation expectations were largely stable.

Bishop said the message was not one of an urgent need for higher US interest rates, with Warsh deliberately avoiding giving markets forward guidance on rate moves.