US Jobs Slow as Carry Trade Risks Put the Rand in Focus

Weaker US jobs data has strengthened expectations that the Federal Reserve will keep interest rates at elevated levels for longer, rather than move quickly to either raise or cut rates. In this week’s TreasuryONE market update, currency strategist André Cilliers said the US economy added fewer jobs than expected, while downward revisions to the previous two months painted an even weaker picture of the labour market. With wage growth also under pressure, consumer spending could slow and help ease inflation over time.

The outlook for oil prices could also play an important role in the Federal Reserve’s next move. Although isolated attacks in the Strait of Hormuz continue to create some uncertainty, geopolitical tensions are no longer the main driver of currency markets. Should oil prices remain contained and inflation continue to ease, the Fed could keep rates unchanged for an extended period as it seeks to balance its employment and inflation objectives.

Attention is also turning to the Japanese yen and the potential impact of the carry trade on emerging-market currencies. Investors have traditionally borrowed in low-interest-rate currencies such as the yen and invested in higher-yielding markets. However, any sudden strengthening of the yen could trigger an unwinding of these positions, prompting investors to withdraw money from emerging markets and potentially placing pressure on currencies such as the rand.

For now, Cilliers remains comfortable with a rand trading range of around R16.25 to R16.75 against the US dollar, but warned that the “winds of change” are beginning to emerge. While external factors have supported the currency, domestic concerns around weak economic growth, political uncertainty and pressure on government finances could become increasingly important. Any deterioration in fiscal discipline, combined with changes in global capital flows, could lead to sharper moves in the rand and will need to be watched closely.