South Africa's rand recovers as Fed fears cool

JOHANNESBURG (Reuters) -South Africa's rand firmed on Thursday, recovering alongside other emerging market currencies following the surprise inflation increase in the United States, as investors saw smaller chances of higher lending rates by the Federal Reserve.

The rand was 0.28% firmer at 14.0975 per dollar compared to an overnight close of 14.1400.

Data on Wednesday showed U.S. consumer prices increased the most in nearly 12 years in April, intensifying concerns over rising inflation and raising expectations that the central bank would tighten its monetary policy.

Those fears cooled somewhat on Thursday with traders taking heart from a Fed official saying the twin surprises of weak jobs growth and strong inflation had not dented the bank's plans to keep its support for the economy.

Another jump in mining production, with output up 21.3% year-on-year in March, also aided demand for the rand, although analysts cautioned that the strong recovery was due to base effects after sharp plunges last year due to COVID-19 lockdowns.

"Looking ahead, the sector faces counter-balancing factors. On the international front, improving industrial activity and firmer commodity prices will support higher production," said analysts at Nedbank in a note.

"Domestically, however, an uncertain legislative framework and unreliable power supply pose imminent downside risks."

Shares on the Johannesburg Stock Exchange (JSE) failed to shrug off a pall of gloom that hung over global stocks due to inflation worries, but managed to recoup some losses at the fag end of trading after a rebound in Wall Street.

The local stock market, just like global markets, is hovering around its all-time high levels and investors are prone to take profits on signs of slight worry.

"Whenever markets are expensive, any change in perception, or any change in expectations can push the market strongly up or strongly down," said Wayne McCurrie, portfolio manager at FNB.

He said inflation is that worry which would keep the pressure on the market for the next few months. "The bull market is behind us," he added.

The benchmark FTSE/JSE all-share index shed 1.86% to end at 66,169 points and the blue-chip index of top 40 companies ended 2.14% down to 60,211 points.

Bonds weakened, with the yield on the government bond due in 2030 up 6.5 basis points to 9.14%.

(Reporting by Mfuneko Toyana and Promit Mukherjee; Editing by Shailesh Kuber)