FX Market Update: South African Rand Surges After SARB Cut

US dollar index falls after Fed

The US dollar index tumbled to $100.20, its lowest level since July last year as the market reacted to the latest Federal Reserve interest rate decision.

In its meeting on Wednesday, the bank decided to cut interest rates by 0.50% for the first time since 2020. The forceful cut meant that officials are highly concerned about the weakening labor market as the unemployment rate has risen to over 4%.

The Fed also believes that inflation will continue falling and that it will move to the 2% target soon. Recent data showed that the headline Consumer Price Index (CPI) fell to 2.5% in August, the lowest point since 2021.

Therefore, analysts now expect that the Fed will cut interest rates in its next meeting in November and December.

Zimbabwe ZiG continues falling

Meanwhile, in Zimbabwe, the recently launched Zimbabwe ZiG continued falling amid rising demand for US dollars. The currency dropped to 14, its lowest level on record, pushing the central bank continued its interventions. It pumped $64 million to the market to prevent further weakness.

However, the ZiG has done worse in the black market, where some traders are quoting it at 26, meaning that it has lost most of its value since April. In an opinion piece, the central bank governor pledged to continue interventions as the country adjusts to the new currency. He said:

The Reserve Bank may consider deploying reserves to stabilize the currency in the event of severe market disruptions that threaten economic stability.

Zimbabwe Central Bank

The Zimbabwe ZiG, which is backed by gold and US dollars, faces numerous challenges such as the ongoing economic crisis caused by drought. It also faces a crisis of confidence since most Zimbabweans have suffered when the last five currencies plunged.

South African rand surge continues

The South African rand continued its uptrend against the US dollar after the central bank started cutting rates. The USD/ZAR has retreated for two consecutive weeks, reaching a low of 17.41, its lowest point since January 2023. It has fallen by over 12% from its highest level this year.

The South African Reserve Bank (SARB) decided to cut rates by 0.25% for the first time since 2020. This cut came a day after a report by the statistics agency showed that the country’s inflation rate dropped to 4.2%, helped by the strong currency.

Analysts expect that Governor Lesetja Kganyago to maintain a cautious tone going forward. In this, he will deliver gradual interest rate cuts to prevent overheating the economy.

The South African rand has also strengthened after the African National Congress (ANC) formed a coalition government with the business-friendly Democratic Alliance. Since then, business and consumer confidence have risen, raising the possibility that the economy will bounce back.

Nigerian naira rallies

In Nigeria, the naira crashed to a record low of 1,652 against the US dollar and then bounced back to 1,593.

This rebound was mostly because of the Fed rate cuts, which raised the possibility that investors will start moving to emerging markets.

The Nigerian naira has been one of the worst-performing currencies, falling by over 70% in the last 12 months. The decline accelerated after the new government removed subsidies in its bid to save over $10 billion annually. It then devalued the currency to bridge the gap between the official and the black market rate.

The main catalyst for the Nigerian naira this week will be the central bank decision. Analysts expect it to continue hiking interest rates as it aims to make the naira attractive to investors and savers.

Sterling surges after the BoE decision

The GBP/USD exchange rate continued surging, reaching its highest point in over two years. It rose to a high of 1.3325, 10% increase from the lowest point in September last year.

In its meeting, the bank decided to leave interest rates unchanged at 5.0%. It also signaled that its cutting cycle will be gradual, a move it hopes will prevent the economy and inflation overheating.

The decision came a day after the UK published its inflation report. According to the statistics agency, the headline inflation remained at 2.2% even as services inflation rose to 5.6%.

Analysts are divided on the next pace of cuts. In a report, analysts at Deutsche Bank predicted that the bank will cut rates one more time this year while those at ING and Goldman Sachs expect it to cut by 50 basis points by end of the year. ING analysts noted that:

Later this year, however, we think the Bank will be more confident in the inflation outlook and will be content with accelerating the pace of cuts.

Deutsche Bank

Japanese yen retreats

The USD/JPY exchange rate continued rising after the Bank of Japan (BoJ) left interest rates unchanged at 0.25% even as inflation jumped to its highest point in months.

In the statement, Governor Kazuo Uoda hinted that he was watching inflation and the performance of the Japanese yen. He expects that the normalization process will continue, with analysts predicting that it will happen in the December meeting.

BoJ rate hikes are notable because the bank has left interest rates low for many years, creating one of the most popular carry trade opportunities. Now, with it hiking while the Fed is cutting, this carry trade has been invalidated. Analysts expect it to cut rates again in December.