The United States (US) Federal Reserve (Fed) raised rates by 25 basis points on Wednesday, taking the Fed funds rate to 3.75% to 4%. This was the first-rate hike since July 2023, and while the unanimous vote was expected, the Fed’s tone was not. Fed Chair, Kevin Warsh – appointed by a US President, Donald Trump, who wanted lower rates and who responded to the decision by calling for rates of 1% or less – told reporters that inflation had been too high for too long and the Fed was removing a dose of accommodation (Fed speak for reducing monetary stimulus). The Summary of Economic Projections showed that 16 of the 18 submitting officials expect at least one further hike this year, and futures now price in close to a 90% probability of that move, while the US 10-year Treasury yield holds near 5%, a level last reached in 2007.
What makes the decision hawkish rather than simply a move to target inflations, is the nature of the inflation being targeted. Much of the inflationary pressure stems from energy prices linked to the US-Iran conflict, which Warsh conceded monetary policy has no control over. So, the Fed is tightening not with the expectation that higher rates will lower the oil price, but because US inflation sitting above target for five years needs to be addressed.
THE RAND’S ODD COMPOSURE
Against that backdrop, the rand’s composure looks odd. The $/R exchange rate moved from around R16.23/$ before the decision, to roughly R16.30/$ following it. The currency then ran out of steam towards the R16.40/$ mark on a day when the dollar posted its strongest session in three months. The explanation lies in carry (the cost of holding a currency based on the interest rate difference of the two currencies).
Holding the rand is currently attractive, since the South African Reserve Bank’s (SARB’s) repo rate of 7% sits 300 basis points above the upper level of the Fed funds range and, with local consumer price index (CPI) inflation at 4.3% in July, it delivers a real policy rate close to 2.7% against a Fed real rate that is barely positive. That gap has been drawing capital, with global investors buying a net R23.1 billion of South Arica Government Bonds in the first week of August, the largest weekly inflow since January according to JSE data.
RAND’S COMPOSURE, HOWEVER, IN QUESTION
Stability built on carry is, however, only as durable as the capital behind it, and South Africa’s balance of payments shows how much that capital is now being asked to hold – while gold, near $4,310/ounce, continues to support export earnings through price (even though mining output contracted by 3% in the second quarter), the country’s current account swung from a surplus of 2.3% of gross domestic product (GDP) in the first quarter, to a deficit of 2.6% in the second quarter, the widest spread since the third quarter of 2019 and twice the consensus forecast, as the value of crude oil imports rose by 82.1% on volumes up only 1.8%.
The reality is that country’s currency inflows follow the bond yield differential rather than the underlying economy, and every support beneath the rand is exposed to the Fed’s decisions, because further tightening narrows the carry differential, lifts real US yields, and weighs on gold, while the oil price driving inflation is widening the gap that must be funded by those inflows. With traders already pricing three Fed hikes through to June 2027, a currency financing a widening external deficit with hot money should be carrying a larger risk premium than the rand is currently carrying.
SARB BALANCING ACT
This places the SARB in a difficult position ahead of its decision on 23 September. The July interest rate hold came on a four-to-two split with both dissenters favouring a further 25-basis point hike, and the 3% inflation target and its one-percentage-point tolerance band, places July’s 4.3% CPI print above the SARB’s target ceiling. This week’s Fed decision weakens the argument for patience, because the rand’s strength has been the principal factor containing import inflation, although the case for holding strengthened this week as GDP contracted by 0.2% in the second quarter and South Africa’s Bureau for Economic Research’s third quarter survey showed five-year inflation expectations easing to 4% and household 12-month expectations falling from 6% to 4.9%. These factors could all justify a hold, but with two members already voting to hike, a hold is more likely to carry hawkish guidance than to mark the start of an easing cycle.
THE DEMAND OF A RISK PREMIUM
The rand has already shown how quickly a risk premium can be demanded. When the SARB held rates steady on 23 July, against the expectations of 17 of the 20 economists surveyed by Bloomberg, the rand fell by more than 2% in a single session, the worst performance of any currency that day, and came close to R17.00/$ the following morning, which is the impact of repricing a narrower differential in a market positioned for carry.
The rest of the year offers several opportunities for a repeat, with the SARB’s November Monetary Policy Committee meeting, the US Mid-Term elections on 3 November, South Africa’s local government elections on 4 November and the December Federal Open Market Committee Meeting offering a potential rate hike, all potentially hitting the rand. In addition, Washington’s visa restrictions on South African officials, which the US has described as the first of several measures targeting South Africa, add a diplomatic risk the market has so far ignored.
OUR ADVICE TO CLIENTS
The rand is, therefore, more likely to retest R17.00/$ level before year-end than to hold below R16.00/$. Importers and corporates with dollar liabilities should extend cover at current levels, since forward points of roughly 1.5% over six months cost less than half of what the rand lost in two sessions in July. For private clients, a rand near R16.30/$ and a 10-year US Treasury yield near 5% offer a better entry point for offshore allocations than the market is likely to provide once the deficit is priced in.
TURNING TO THE MARKETS
THE WEEK’S KEY THEMES:
- Global government bond yields eased across the board on Thursday
- Wall Street rebounded more than 1% from the post-Fed-hike selloff
- Gold is consolidating in the $4,300/ounce range
- The dollar is holding near a seven-week high after Wednesday’s Fed rate hike
BONDS
The 10-year US Treasury yield eased to around 4.94% at Thursday’s close, down roughly five basis points, after spiking above 5% in the immediate wake of the hike (an intra-week peak near 5.04%, the highest level in close to two decades). The move lower is a pullback from the top of the range, but is not a trend reversal because the curve is repricing a higher-for-longer hawkish Fed, and the day’s relief came largely from softer oil rather than any dovish signal.
Germany’s 10-year Bund closed near 3.48%, down about three basis points, having recently touched roughly 3.55% – its firmest level since 2009. The move mirrors the fall in US bond yields and the second consecutive session of easing oil prices. The European Central Bank (ECB) Governing Council raised the deposit rate by 25 basis points to 2.50% on 10 September, leaning against Iran-war-driven energy inflation. Bunds remain the eurozone’s anchor, and at these levels they signal a market braced for sticky inflation and further ECB tightening rather than a concern over falling growth.
The United Kingdom’s (UK’s) gilts were outperformer for the week, with the 10-year yield dropping around 11 basis points to about 5.24%. The rally reflects the Bank of England’s (BoE’s) decision to hold the Bank Rate at 3.75% in a six-to-three vote, combined with a six-month pause in active quantitative-tightening gilt sales. Gilt yields are off their recent near-two-decade highs but still elevated, underlining that the BoE is balancing above-target inflation against a fragile growth backdrop.
South Africa’s 10-year government bond yield eased to roughly 8.79%, down about 11 basis points, tracking the global rally and the pullback in crude prices. This is a retreat from levels above 9% seen earlier in the month – the highest since late March – so the day’s move is a pullback from a multi-month high rather than a mid-range drift. Local direction now hinges on the SARB rate decision on 23 September, where the market is split between a hold and a hike, and on whether softer oil translates into a calmer inflation path after July CPI cooled to 4.3%.
EQUITIES
Wall Street staged a broad rebound at Thursday’s close, recovering ground lost in the initial reaction to the Fed’s hawkish outlook. The S&P 500 rose 1.14% to 7,638.16, the Dow Jones Industrial Average added 0.71% to 51,827.42, and the NASDAQ Composite jumped 1.67% to 26,413.17, with the NASDAQ 100 up around 1.73%. Semiconductors and mega-cap technology led the bounce, helped by easing yields and constructive chip-demand commentary. The S&P 500 set an all-time high near 7,799 earlier in 2026 on rate-cut hopes, so Thursday’s close is roughly 2% below the record.
The Euro Stoxx 50 closed firmly higher, up around 0.8% near 6,320, on Thursday, riding the global risk-on tone and the relief from softer oil and gas prices, which temper the region’s inflation anxieties. European equities have been resilient through the rate-repricing, but indices remain sensitive to any renewed move higher in energy or core-eurozone yields.
The FTSE 100 was a strong performer on Thursday, gaining about 1.19% to roughly 10,816, supported by the same global rebound and by the BoE’s steady hand. The index’s heavy weighting toward commodities and internationally exposed earners means firm oil and a softer pound can both boost investor sentiment, and the gilt rally provided an additional tailwind for rate-sensitive sectors.
The JSE All Share advanced 0.53% to 114,156.64, a more measured gain than its developed peers, tracking the improvement in global risk appetite and the pullback in local yields. The local market remains caught between a supportive move in bonds and a firmer rand on the day, set against gold trading well below its record – a structural drag for the resource-heavy index.
COMMODITIES
Spot gold is trading at roughly $4,352/ounce. The metal is consolidating below its earlier 2026 record and is down on the month, a clear reflection of the hawkish Fed as a stronger dollar and higher real yields are the classic headwind for non-yielding gold. Offsetting that is a genuine safe-haven demand due to US-Iran tensions, which has minimised any pullback from bullion.
Brent crude is around $104/barrel and West Texas Intermediate is near $101/barrel, both easing modestly – roughly 1.6% and 0.5% respectively – after a strong run. The pullback reflects some relief on supply as Saudi pipeline capacity was restored, but the bigger picture is that both benchmarks sit near multi-year highs, up sharply on the month, on fears around the Strait of Hormuz and broader US-Iran escalation. Elevated crude prices are the awkward complication for every central bank, as they are feeding the inflation pressure.
CURRENCIES
The US Dollar Index is holding around 100.2, near its firmest level in roughly seven weeks. The hike and the hawkish projections have widened the dollar’s rate advantage. With today’s light data calendar, the greenback’s near-term direction rests on upcoming data releases, Fed commentary and any repricing of the Fed’s projected December rate decision.
The euro is trading near $1.148/€, close to its weakest level since late July and down on the month, with the interest rate differential working in the dollar’s favour. While the ECB also hiked rates in September by 25 basis points to 2.50%, it still sits far below the Fed’s fed rate of 3.75% to 4%, and the Fed’s hawkish projections have widened the differential further, pushing the euro toward multi-week lows.
Sterling is hovering around $1.335/£, also near its softest level since late July. The BoE’s decision to hold while the Fed hiked has moved the rate differential against the pound in the near term, even though above-target UK inflation keeps a future BoE hike on the table.
The rand firmed modestly on Thursday, with the $/R rate easing around half a percent to roughly R16.29/$. The rand is near its weakest level in about six weeks against a broadly strong dollar, yet it remains up around 6% over 12 months, which is resilient given the headwinds currently prevailing in the market. Near-term direction will track global risk appetite, the dollar, and the SARB decision on 23 September.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.25
EUR/ZAR: 18.65
GBP/ZAR: 21.72
BRENT CRUDE: $102.23
GOLD: $4,393.63
Written by Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.
Sources: Bloomberg, Business Day, CNBC and Statistics South Africa.
