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S.Africa's rand retreats as rising U.S. inflation awakens tightening fears

3 minute read

South African Rand coins are seen in this illustration picture taken October 30, 2020. REUTERS/Mike Hutchings/Illustration

JOHANNESBURG, May 12 (Reuters) - The South African rand weakened on Wednesday as a jump in consumer prices in the United States raised fears that the central bank would tighten its monetary policy, cutting off a key source of supply to riskier assets.

At 1500 GMT, the rand was down 0.27% at 14.0375 per dollar, having touched a session best of 13.9525 before succumbing to risk aversion after the U.S inflation print prompted some investors to take profits from the unit's recent rally. read more

The rand has been the best-performing currency against the dollar in recent weeks, up around 5% this year.

The rand, which hit a 16-month high on Tuesday, has had a strong run since March prompted by lower rates in the developed world, a surge in global commodity prices and signs the local economy is on track for a better-than-expected recovery.

"There are concerns over the impact that tightening financing conditions abroad will have on the ZAR, given SA's fragile fiscal risk profile," said economists at ETM Analytics.

Bonds weakened, with the yield on the benchmark government bond due in 2030 up 8 basis points at 9.06%%.

Shares on the Johannesburg Stock Exchange (JSE) opened strong but closed marginally higher than Tuesday, as U.S. consumer price numbers showed signs of inflation catching up with unfettered growth of emerging market stocks.

Higher inflation, which triggers a rise in interest rates, eats away the value of future returns on investments, while higher interest rates increase the cost of capital for companies.

The benchmark all-share index (.JALSH) closed up 0.27% at 67,424 points, while the blue-chip index ended up 0.34% at 61,529 points.

"Markets obviously react to headlines and today's U.S. inflation numbers have shaken the markets," said David Shapiro, an independent market analyst.

However, he added this could be "transitory" as the U.S. government's risk-free treasury yields have not risen enough to show inflation is a worry.

Reporting by Olivia Kumwenda-Mtambo; Editing by Vinay Dwivedi

Our Standards: The Thomson Reuters Trust Principles.

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