Fed rate rise could put rand under even more pressure

By Janice Roberts
Editor
Nigel Green, CEO, deVere Group

Nigel Green, CEO, deVere Group

In the past week, South Africa has pummelled through three finance ministers. The Rand has plummeted with the unprecedented axing of Nhlanhla Nene, appointment of David van Rooyen, and recently clawed its way up with the reappointment of former Finance Minister, Pravin Gordhan.

Now, after much speculation, the long-awaited Fed rates hike was officially announced yesterday by Federal Reserve chairwoman Janet Yellen – the first increase in almost ten years. The Fed, the United States Federal Reserve, made the announcement after the conclusion of the two-day Federal Open Market Committee (FOMC).

Nigel Green, CEO and founder of the deVere Group, one of the world’s largest independent financial advisory organisations, advised earlier this year that investors should get “Fed-ready” and invest in global stock markets to take advantage of opportunities for steady growth.

The Fed last raised interest rates in June 2006, with rates remaining near-zero since December 2008.

Despite the fact that the potential of a rates hike was flagged for more than a year, with 97 per cent of economists surveyed by the Wall Street Journal expecting the increase, it throws yet another spanner into South Africa’s economy.

“Higher U.S. Dollar borrowing costs will make the South African current account deficit more expensive to balance, particularly if this proves to be the start of many rate rises,” says Greg Stockton, head of the deVere Group’s Africa division. “If so, higher SA interest rates and/or further devaluation of the Rand may result.”

Fortunately for South Africa, the finance ministry and the Reserve Bank are two strong and highly respected institutions.

Stockton says that while the Rand has reacted well to the news of Gordhan’s appointment, causing investors to breathe a sigh of relief, the political circus of the last week raises questions – again – over the Zuma presidency.

For those who haven’t yet, Stockton advises that now is the time to diversify – not only within South African assets such as government bonds and commercial property – but internationally.

Globally, Stockton says it is likely that the Dollar will rise as US rates go up. “This will support Eurozone and Japanese exports to the U.S. and the informal dollar-bloc economies, assisting in their broader economic recoveries and contributing to their stock markets being among the best performing,” he says.

“Some members of the informal dollar-bloc – notably China – may seek to devalue against the dollar,” he adds. “China does not want a stronger currency as its own economy slows. However, this will be deeply unpopular in other emerging economies, many struggling to compete against China.”

Despite speculation of a second increase in March, or the potential of a spate of increases, Stockton explains that since a strong Dollar acts as monetary tightening for the US economy, the Fed is likely to see how the currency responds to the first rate hike before officially announcing more.

The FOMC will next meet on January 26 and 27, and again mid-March.

 

 

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