South Africa’s Rand Strengthens on Interest Rate Hike

South Africa’s rand strengthened on speculation that interest rates will be hiked early this year.

The rand traded at 15.6875 against the dollar at 1615 GMT, up roughly 1.4% from its previous close.

Despite other emerging market currencies weakening, it reversed a trend as investors priced in more rate hikes sooner than anticipated as a result of US Federal Reserve minutes. 

Annabel Bishop, an economist at Investec, said in a research note that South Africa’s forward rate agreement curve indicated a 25-basis-point hike in its repo rate as soon as this month’s monetary policy meeting on Jan. 27 and another 25-basis-point raise by the end of March.

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“The rand … has appreciated the potential for sharply rising interest rates in South Africa,” she wrote.

A drop on the Johannesburg Stock Exchange (JSE) on Thursday was the biggest so far this year.

The Fed’s rate hikes typically drain capital from emerging markets (EM), causing their borrowing costs to increase and harming their ability to repay debt.

Markets worldwide turned jittery at the prospect of higher Fed rates, resulting in a sell-off across major stock markets, including the JSE.

With a drop of 1.19% to 74,165 points, the All-share index erased almost all of its gains since the beginning of the year. The blue-chip index of the top 40 companies declined 1.39% to 67,420 points.

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However, companies dependent on the South African economy, such as banks, real estate companies, and consumer goods companies, remained in the black.

Government bonds dipped, with the yield on the 2030 maturity adding 4.5 basis points to 9.43%.

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