News24 | Rand at worst levels in weeks as oil surges, US yields at 2007 highs

Markets now see a Fed hike on Wednesday as a near certainty.

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The rand was trading at R16.31/$ on Tuesday morning, close to its worst level in more than a month.

On Monday, the local currency hit R16.3429/$, a level last seen in the first week of August as the dollar strengthened ⁠as surging oil prices pushed Treasury yields to fresh peaks since 2007, and cemented expectations for a ⁠Federal Reserve rate hike this week.

The benchmark US 10-year Treasury yields reversed an earlier loss and climbed to a high of 5.0266% in Asian trading hours, the highest since 2007.

Oil prices held near a four-month peak, standing at $107 a barrel, after ‌Yemen's Iran-aligned Houthis launched a new wave of attacks on Saudi Arabia and Gulf-Iran talks were postponed.

Markets now see a Fed hike on Wednesday as a near certainty, with CME's FedWatch tool pricing in a roughly 93% chance of ‌an interest-rate increase.

"The combination of higher oil, higher US yields and weaker risk appetite helped lift the US dollar broadly," Christopher Wong, an FX analyst at OCBC, said in a note.

Near-term support may persist, but with a hike now heavily priced in, further dollar upside will likely require the Fed to keep the door open to ‌additional tightening, he added.

“The rand has weakened as US interest rate hikes strengthen the US dollar, while the FRA [Forward Rate Agreement, a contract that locks in a future interest rate] curve has factored in two 25bp hikes for South Africa now as well by the end of the year, providing some, albeit modest support for the rand,” said Investec chief economist Annabel Bishop.

The Monetary Policy Committee meets next Thursday, and will look at a range of variables to make its decision, Bishop added. “While its targeted measure of inflation, CPI, fell sharply in the last reading, oil prices have risen sharply.”

Pressured ⁠by broad greenback strength, the euro hovered near a one-month low at $1.1535 and sterling was 0.1% weaker at $1.3485.

The yen also pulled away from a seven-month high, standing down roughly 0.4% at 154.91 ahead of an expected Bank of Japan rate hike on Friday.

The New Zealand dollar dipped 0.3% to a two-month low of $0.5757, while the Australian dollar was 0.2% lower at $0.7120.

The dollar's six-currency index rose 0.15% to 99.633, also gaining support from weakened risk appetite as shares markets tumbled.

The renewed energy-induced inflation pressures follow a jobs report that was much stronger than expected and a pickup in consumer prices for August, strengthening market conviction that the Fed ⁠will raise rates on Wednesday.

Economists polled by Reuters also expect at least one more hike by the end of March, reversing a fragile no-change consensus prior to Friday's official data showing firm inflation.

The inflation outlook now hinges on oil prices, but the broader macro picture does not warrant more ⁠hikes than currently priced in the curve, analysts at BCA said in a note.

"Limited hawkishness from here argues for curve steepeners and limited USD upside."

Markets are also all but certain that the Bank of Japan will raise rates on Friday. Market sentiment on the yen is starting to shift, with speculators ⁠turning to a net long position on the Japanese currency for the first time since February.

Offshore ‌yuan was flat at ‌6.71 per dollar, hovering near its strongest in more than three years, after data showing China's industrial sector regained strength in August, though consumption remained sluggish.