The theory is…

Nico Kelder, economist at the Efficient Group, says that theory suggests that if interest rate differentials are reduced, the currency with the rising interest rate will appreciate and the currency with the ‘falling’ interest rate will depreciate.

The US increased their interest rates by 25 basis points last night. The result; the dollar weakened by 1.6% against the rand, 0.9% against the euro and 0.5% against the yen.

Furthermore, the rand strengthened against the euro and sterling but not to the same extent, despite the weaker than expected trade data. Obviously the rate increase was expected and discounted but still, the dollar should’ve remained more or less unchanged.

Perhaps the market discounted a larger rate increase. Meanwhile the yields on the bond market strengthened on the back of the good money supply data. Commodity prices increased on the back of the weaker dollar, gold gained 0.5%, platinum 1.7% while the oil price remained virtually unchanged.

European markets closed weaker yesterday ahead of the announcement of interest rate changes in the US. The US markets reacted positively to the higher interest rates but not with over exuberance.

The Hang Seng is closed today while the Nikkei is trading higher by 0.5% so far this morning. We expect weak local equities on the back of the stronger currency today.