WHAT a relief. The US Federal Reserve (Fed)
finally hiked rates for the first time in almost a decade, after what
Fed chairwoman Janet Yellen described as seven "extraordinary" years of
near-zero interest rates.
And the rand didn’t fall out of bed. In truth, it’s hard to see how much more damage could have been done to SA’s currency after the pummelling it received in last week’s finance minister debacle.
The rand was trading against the dollar on Thursday at below R15, which was the level to which it had recovered this week after hitting a low of R16.08 in last week’s turmoil.
The rand seemed hardly to respond to the Fed announcement, nor apparently to the ratings move by Moody’s, which put SA’s rating on negative outlook on Tuesday. However, at around R14.97 it is still well below the levels at which it was trading before the finance minister debacle.
In the rand’s case, it’s hard to separate out local, idiosyncratic factors from international ones. But the Fed’s rate rise didn’t cause much renewed volatility anywhere. Indeed, markets saw something of a "relief rally" yesterday, at the news that the Fed had finally done it.
This is the way it should be. Central banks are supposed to communicate their intentions fairly clearly and should not be surprising the markets.
The Fed has led markets on a merry dance for the past two years since it first caused the global "taper tantrum" by indicating it was ready to look at normalising monetary policy. However, in recent weeks Ms Yellen’s signals have been crystal clear and it would have caused a market rout had the Fed not hiked as expected.
Markets were watching for the tone of the rhetoric, not just the action, and Ms Yellen’s emphasis on the "gradual" pace at which the Fed will now raise rates served to reassure.
The upside of the start of the Fed’s hiking cycle is that it reflects the fact that the US economy’s recovery is sound, and that it no longer needs the stimulus it has had in the seven years of easy money. That is good for the global economy.
The downside for the rest of us is that this is definitely not the first hike, but the initial one of many. That means the world is starting to change, and that change must affect capital flows and currencies over time, even if it doesn’t immediately.
SA and other high-yielding emerging markets benefited richly from capital inflows in the years when US rates were at zero, the world was awash with liquidity and investors were in search of yield.
That capital has already started flowing out of emerging markets and as US rates rise, and the yield gap narrows, that negative trend for emerging markets is likely to continue.
SA is one of the countries that is particularly vulnerable because of our twin fiscal and balance of payments current account deficits. If we want to run those twin deficits, we need constant inflows of foreign capital and that may be in increasingly short supply in years to come. This is not only because of the path to monetary policy normalisation, which the US has now embarked on but also because of our domestic failings. Fitch Ratings had downgraded SA’s sovereign rating two weeks ago so that both it and Standard & Poor’s now have SA just on investment grade and liable to fall into junk-bond territory — a move which would see significant capital outflows and pressure on the rand.
Now Moody’s, which has SA at two notches into investment grade, is threatening to downgrade us too. The damage done by the finance minister crisis will not easily be undone; and there is little sign that the government is focused on boosting the growth rate above the pathetic 1% range.
That will leave the rand vulnerable to market sentiment and the risks to inflation and to growth. The Reserve Bank’s monetary policy committee will still have quite a dilemma at its next meeting. But that’s for next year.
And the rand didn’t fall out of bed. In truth, it’s hard to see how much more damage could have been done to SA’s currency after the pummelling it received in last week’s finance minister debacle.
The rand was trading against the dollar on Thursday at below R15, which was the level to which it had recovered this week after hitting a low of R16.08 in last week’s turmoil.
The rand seemed hardly to respond to the Fed announcement, nor apparently to the ratings move by Moody’s, which put SA’s rating on negative outlook on Tuesday. However, at around R14.97 it is still well below the levels at which it was trading before the finance minister debacle.
In the rand’s case, it’s hard to separate out local, idiosyncratic factors from international ones. But the Fed’s rate rise didn’t cause much renewed volatility anywhere. Indeed, markets saw something of a "relief rally" yesterday, at the news that the Fed had finally done it.
This is the way it should be. Central banks are supposed to communicate their intentions fairly clearly and should not be surprising the markets.
The Fed has led markets on a merry dance for the past two years since it first caused the global "taper tantrum" by indicating it was ready to look at normalising monetary policy. However, in recent weeks Ms Yellen’s signals have been crystal clear and it would have caused a market rout had the Fed not hiked as expected.
Markets were watching for the tone of the rhetoric, not just the action, and Ms Yellen’s emphasis on the "gradual" pace at which the Fed will now raise rates served to reassure.
The upside of the start of the Fed’s hiking cycle is that it reflects the fact that the US economy’s recovery is sound, and that it no longer needs the stimulus it has had in the seven years of easy money. That is good for the global economy.
The downside for the rest of us is that this is definitely not the first hike, but the initial one of many. That means the world is starting to change, and that change must affect capital flows and currencies over time, even if it doesn’t immediately.
SA and other high-yielding emerging markets benefited richly from capital inflows in the years when US rates were at zero, the world was awash with liquidity and investors were in search of yield.
That capital has already started flowing out of emerging markets and as US rates rise, and the yield gap narrows, that negative trend for emerging markets is likely to continue.
SA is one of the countries that is particularly vulnerable because of our twin fiscal and balance of payments current account deficits. If we want to run those twin deficits, we need constant inflows of foreign capital and that may be in increasingly short supply in years to come. This is not only because of the path to monetary policy normalisation, which the US has now embarked on but also because of our domestic failings. Fitch Ratings had downgraded SA’s sovereign rating two weeks ago so that both it and Standard & Poor’s now have SA just on investment grade and liable to fall into junk-bond territory — a move which would see significant capital outflows and pressure on the rand.
Now Moody’s, which has SA at two notches into investment grade, is threatening to downgrade us too. The damage done by the finance minister crisis will not easily be undone; and there is little sign that the government is focused on boosting the growth rate above the pathetic 1% range.
That will leave the rand vulnerable to market sentiment and the risks to inflation and to growth. The Reserve Bank’s monetary policy committee will still have quite a dilemma at its next meeting. But that’s for next year.
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