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Rand to benefit from the US Fed’s inflation-averaging pivot

Rand to benefit from the US Fed’s inflation-averaging pivot

1 September 2020


The impact of the Fed’s decision to adopt inflation-averaging as a policy objective instead of point targeting will be felt far more widely than in the US.

In fact, emerging markets stand to benefit and SA has already seen the rand rally in response. But it’s a high-stakes game and all players have much to lose if the Fed’s new policy stance backfires.



The US Federal Reserve’s decision to pursue an average inflation target last week will not only be of benefit to the US economy – if successful – but is also expected to offer positive spin-offs for emerging markets that will now have more monetary policy space to keep interest rates lower for longer.

Rallying emerging market currencies in the wake of the Fed’s decision reflected this positive sentiment, with the rand gaining 5% from its 10 August weakest point of R17.70 to the dollar to R16.82 to the dollar at the end of the first day of spring. There was a short-lived political uncertainty-induced retreat over the weekend.
Still, the domestic currency bounced back when President Cyril Ramaphosa appeared to have won over the ANC in his anti-corruption imperative.



A weaker dollar, as a result of an extended period of lower real interest rates, is also expected to be of benefit to emerging markets. The greenback has been under pressure for a while in the face of the lower rates for longer narrative, which is now likely to be around for even longer than previously anticipated.



Source: Daily Maverick

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