The South African Rand opened the week on the back foot as the country participates in the Local Government Elections. Indications are that the ruling party is wounded due to ugly factional fights and the general unrest among citizens who feel that life is becoming harder by the day. The ruling party, the African National Congress (ANC), is sweating to retain its majority control in municipalities.
However, the Rand’s weakness follows another tough week that it endured since the third week of August 2021. Last week, the Rand gave up all gains from the previous week, setting the tone for what could be a tough week ahead.
The USD/ZAR pair was trading at 15.31 at the time of writing, in line with Friday’s peak of 15.32.
The Rand’s weakness is because of a number of factors, some domestic and some international. On the domestic front, investors could have been spooked by the stage 4 load shedding that the country endured for the better part of last week. The power supply issue in the country continues to dampen investor sentiment.
On the international front, rising U.S. inflation could be leading to a few investors believing that a tighter policy rate might be on the way sooner than expected. This, however, is not in line with the Fed’s indication. Fed officials have been on record saying that the current U.S. inflation was transitory, which does not warrant tightening the policy rate.
Inflation in the U.S. has been higher for the better part of the year. The recent number matched the highest record so far this year. It also reached a 13-year high of 5.4% in September 2021, rising from 5.3% in August.
Even though these high inflation numbers have not shown signs of easing throughput the second quarter of the year until now, Fed officials still think it is transitory. Commenting on the current inflation, The Fed Chair, Jerome Powell, once said that it “is a function of supply-side bottlenecks over which we have no control. But I would say that we do expect in the first half of next year to see some relief, depending on the bottleneck in question, and inflation should move down.”
He also added that “we are far away from full employment, so that gives us an incentive.”
Other countries such as Canada and the U.K. have indicated the need for tighter monetary policy next year. Rising inflation in South Africa could also lead to calls for the same. It has been above the midpoint target inflation rate of 4.5% since May 2021. The inflation target band in South Africa is 3%-6%. But, even though inflation might be on the rise, tightening rates to control the Rand might not be ideal for an economy already in need of growth. Until the recent quarter, the country has been recording annual GDP growth rates in the negative territory.