An already fragile rand was back on the ropes in trade on Thursday (12 May), put there by a strong dollar benefitting from risk aversion.
Bloomberg reported that Wednesday’s hotter-than-expected US inflation reading has revived concerns of a 75 basis-point rate increase by the Fed, rather than the 50 basis-point pace that markets have come to grips with.
Worries about the impact of rising rates on economic growth, combined with the war in Ukraine and slowing Chinese demand amid Covid lockdowns, are battering risk assets, it said.
“We’re seeing the beginning of the capitulation and the great reset, if you want, in pricing,” Virginie Maisonneuve, global chief investment officer for equity at Allianz Global Investors UK, said on Bloomberg Television. “Right now the big question is peak inflation.”
US inflation is remaining persistently high, raising the prospect of aggressive Fed rate hikes and keeping the dollar on the front foot, noted Treasury One.
It noted that US CPI grew by 8.3% YoY versus market estimates of 8.1%, but the concern was more around Core CPI, which jumped by 0.6% MoM versus the expected 0.3%. The rand, which had firmed to below R16.00 earlier, weakened to R16.17 levels post the CPI data, before eventually closing firmer at R16.09 on the day.
“This morning we see increased risk aversion as the dollar strengthens further, and we have the rand trading sharply weaker at R16.21.”
Bianca Botes, director at Citadel Global said that global markets anticipate that the aggressive tightening by the Fed will continue as a result of rising US inflation, with hikes of 50bps at each of the upcoming Federal Open Market Committee (FOMC) meetings this year.
“The dollar saw some weakness across the board yesterday but quickly recovered during Asian trade this morning. This afternoon we will also keep an eye on US PPI and jobless claims,” Botes said.
The rand traded at the following levels against leading currencies:
- Dollar/Rand: R16.20 (0.86%)
- Pound/Rand: R19.76 (-0.19%)
- Euro/Rand: R16.95 (0.22%)
Cost pressures unrelenting for agriculture
Following the finance minister’s generous accommodation of an almost two months reprieve in the fuel price that entailed a R1.50 cents per litre reduction in the general fuel levy, farmers face a hefty fuel bill next month as the intervention period lapses, noted Paul Makube, senior agricultural economist at FNB Agri-Business.
“The R1.50 cents/ litre will be back into the fuel calculation – and considering the exchange rate depreciation of 9.0% month-on-month (m/m) and 11.4% year-on-year (y/y) so far with crude weakening by 5.4% m/m and 59.0% y/y, a further R3/ litre in fuel increases is possible in June 2022 if the relief measures are not extended or a new fuel price determination is implemented,” he said.
Furthermore, indications are that the interest rate hikes will be aggressive going forward following a second increase of 25 basis points in March which brought the repurchase rate to 4.25%.
“Farmers, therefore, face higher debt serving costs in a record-high input cost environment,” said Makube.
“We are heading into increased activity in the agriculture calendar and demand and consumption of fuel is high. The escalation in fuel costs does not bode well for producers as production costs are likely to escalate across the value chains that manifest differently from planting, harvesting, distribution and packaging.”
Makube said that summer grain and oilseed harvest is in its infancy and will start ramping up in June while cultivation operations for winter crops are currently in full swing. Grain producers and logistics companies in the agriculture value chain will feel the pain as closer to 80% of grain is transported by road.
“Livestock and horticulture with citrus harvest in its infancy will also be affected in terms of distribution across the country and for exports. This will obviously push food inflation to remain above 6% in the near term,” the economist warned.
Social unrest warning
Surging international food prices will hit Africa’s economies the hardest and may trigger social unrest if governments fail to cushion the blow, according to a report by Oxford Economics Africa.
Food has a heavier weighting in the inflation baskets of African nations, compared with those in advanced economies, due to purchasing patterns.
In advanced economies, it accounts for as much as 15% of the basket, while in Africa it exceeds 25%, with some countries including Ethiopia, Zambia, Sudan, and Nigeria having food weightings above 50%, economists Jacques Nel and Petro van Eck, at Oxford Economics Africa said in a research note.
The war in Ukraine, bans on food exports such as palm oil, supply chain glitches and a drought curbing the US wheat crop have sent prices skyrocketing, Bloomberg reported. In March the UN’s FAO food price index soared 13%, the fastest pace on record, before easing slightly in April.
Higher food prices coupled with soaring fuel bills and rising unemployment make for a volatile political environment on the continent and have prompted governments to react even at the expense of fiscal consolidation, said Nel and van Eck.
Egypt and Nigeria have delayed plans to end costly food and fuel subsidies while Morocco, Kenya, and Benin have increased minimum wages and South Africa has extended monthly stipends for the jobless and cut its general fuel levy for two months.