Rand back among top emerging market currencies after outsize rate hike

It took a rate hike of a magnitude not seen in more than six years to put South Africa’s currency back among the emerging-market currency winners.

The rand ended its worst streak of weekly losses since April 2020, elevating the currency to a list of just seven in developing-nations to post gains versus the dollar this year. By early afternoon on Friday, the rand was 2% stronger at R15.83/$.

The South African Reserve Bank on Thursday raised borrowing costs by 50 basis points to 4.75% and signaled it saw a steeper rate-hike path going forward.

China’s latest measure to bolster its economy also may support rand gains, as the country is the biggest buyer of South African raw materials.

Chinese banks cut a key interest rate for long-term loans by a record amount, a move that would reduce mortgage costs and may help counter weak loan demand caused by a property slump and Covid lockdowns.

The five-year loan prime rate, a reference for home mortgages, was lowered to 4.45% from 4.6%, according to a statement by the People’s Bank of China Friday. That was the largest reduction since a revamp of the rate in 2019. A majority of economists surveyed by Bloomberg had predicted a cut by five to 10 basis points.

The cut is a significant move to boost loan demand, as consumer and business confidence has been battered by Covid lockdowns and a downturn in the property sector that has seen a string of developer defaults and falling home prices. The lower rate will be applied to new mortgages immediately, while existing mortgages won’t be repriced until next year at the earliest.

Currency forecasts compiled by Bloomberg see the currency averaging 15.90 per dollar in the second quarter, compared with Friday’s spot level of around 15.85. The forecast has climbed from 14.81 a month ago amid concerns Federal Reserve tightening will erode the rand’s yield advantage over the greenback.

Investors in the futures market have remained bullish on the currency despite the risk-off sentiment of the past month. Traders still hold historically high net-long positions, meaning contracts betting on rand gains against the dollar outweigh wagers on declines, Commodity Futures Trading Commission data show.

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