The rand spent Monday and Tuesday at its weakest levels in weeks, and almost nothing that happened in South Africa caused it. On Monday 14 September it touched R16.34 to the dollar, a level last seen in the first week of August, and by Tuesday evening it was at R16.25. The chain that got it there starts with a tanker.
Oil went up first. Yemen's Iran-aligned Houthis launched a fresh wave of attacks on Saudi Arabia, talks between the Gulf states and Iran were postponed, and Brent crude sat at $107.32 on Tuesday lunchtime, near a four-month peak. Expensive oil feeds straight into inflation everywhere, which is why the next thing to move was the American bond market: the benchmark 10-year Treasury yield climbed to 5.0266% in Asian trading, its highest since 2007.
Why a bond yield in New York moves a currency in Johannesburg
A higher yield on American government debt makes holding dollars more rewarding and holding anything riskier less so. Money moves accordingly, and it comes out of exactly the kind of currency the rand is. Emerging-market currencies fell for a fourth straight day on Tuesday, with MSCI's benchmark for developing-nation currency returns down 0.3% by late morning in London and its equity gauge off 0.9%. Lee Hardman at MUFG Bank notes that high-yielding, commodity-linked currencies like the rand and the Mexican peso have underperformed since the dollar started rebounding, and warns the downside risks intensify if rising yields and energy prices trigger a deeper correction in risk assets into year end.
What South Africa added to it
The domestic contribution was real but secondary. Bianca Botes at Citadel Global points to a firmer dollar and the oil shock arriving on top of softer gold and genuine local fragility, naming a second-quarter contraction in gross domestic product and a sharp drop in mining output. Investec chief economist Annabel Bishop adds the other side of it: the forward rate agreement curve, which is where the market prices where South African interest rates are heading, has factored in two 25 basis point hikes here by the end of the year, and that offers the rand some modest support.
Bishop also flagged the awkward part of the local picture. Consumer inflation, which is what the Reserve Bank actually targets, fell sharply in the last reading, and oil has risen sharply since. Those two pull in opposite directions for a committee deciding what to do with rates.
Markets had priced Wednesday's US Federal Reserve decision as close to settled before it landed, with CME's FedWatch tool putting a roughly 93% chance on an increase, after a jobs report that came in much stronger than expected and a pickup in August consumer prices. Economists polled by Reuters expect at least one more by the end of March. The South African Reserve Bank's own committee meets later this month, and local analysts are predicting a 25 basis point rise when it does.
