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Money Market FundsThe US Federal Reserve’s renewed focus on inflation has strengthened expectations that interest rates could rise again, putting the dollar back on the front foot and increasing pressure on emerging-market currencies. Speaking at the Jackson Hole Symposium, Fed Chair Kevin Warsh indicated that persistent inflation remains a key concern, prompting markets to increase the probability of a September rate hike from around 35% to 60%.
The outlook is complicated by signs of weakness in the US labour market, with upcoming non-farm payroll data expected to show softer employment conditions. TreasuryONE said the Fed will therefore need to weigh persistent inflation against slowing job creation before making its next move. While inflation appears to carry greater weight for now, further CPI, PCE and employment data will be important in determining whether the Fed ultimately raises rates or remains on hold.
The change in US interest-rate expectations has already provided support for the dollar, contributing to the rand moving back above the R16 level. The local currency is also facing pressure from South Africa’s terms of trade, with commodity prices softening while oil has moved back above $90 a barrel. As a major South African import, higher oil prices combined with weaker export commodity prices create additional pressure on the rand.
TreasuryONE expects the rand to trade largely between R16.00 and R16.25 against the dollar over the coming week, with US economic data and geopolitical developments likely to remain important market drivers. Importers may also continue to use periods of rand strength to secure short-term cover, adding to demand for foreign currency. With several major data releases still ahead, markets are likely to remain sensitive to changing expectations around US interest rates.