In recent days, the rand has made significant gains against the US dollar, registering a 4% gain. As the US dollar is under pressure, the rand has strengthened significantly, reaching R17.81/$ on Tuesday afternoon, after reaching R18.18/$ just a day earlier. The rand has reached its highest level in over 15 weeks, which is a significant improvement given that it was trading above R19/$ just last week. In comparison to a year ago, the local currency is now only 4% weaker against the dollar, a significant improvement from the 26% depreciation seen at the start of June. Furthermore, the euro reached its highest level against the dollar since the beginning of 2022 on Tuesday.
The dollar’s weakness can be attributed to investor speculation that the Federal Reserve (Fed) will refrain from making significant interest rate hikes in the aftermath of recent inflation data that fell short of expectations. US interest rates are important in determining the value of the rand because South Africa has historically offered higher interest rates than the US, making rand investments appealing. However, due to the aggressive rate hikes in the United States, the interest rate differential has narrowed, making rand assets less appealing in comparison.
On Thursday, the South African Monetary Policy Committee will announce its most recent interest rate decision. Economists disagree on whether rates will remain unchanged or if a small 25 basis point increase will be implemented. The Fed’s subsequent interest rate decision, scheduled for the following week, will also have a significant impact on the rand’s performance. If the Fed decides not to raise interest rates, the rand may rise further. A rate hike and a more hawkish stance on future increases, on the other hand, could dampen the rand’s recent positive momentum.
According to Investec economist Annabel Bishop, the rand will likely remain volatile due to a variety of factors. The performance of the currency will be heavily influenced by the outcome of US economic data and financial market events. Concerns about fragile local economic growth, political uncertainties ahead of the 2024 election, and concerns about the future strength of state finances all continue to weigh on the rand’s prospects. Bishop also mentions that the ongoing BRICS summit and a possible visit by Russia’s president may have an impact on financial market sentiment towards the rand. Furthermore, as reported in the press, corruption allegations against key members of Deputy President Paul Mashatile’s family have heightened concerns.
Surprisingly, despite weaker-than-expected Chinese economic growth data released on Monday, the rand held its ground on Tuesday. This data suggests that Chinese demand for South African commodity exports may fall, which usually has a negative impact on the rand. However, it seems that the positive factors influencing the rand’s performance have outweighed these concerns for the time being.
In summary, the rand’s recent gains against the dollar can be attributed to the US currency’s weakness and expectations that the Fed will refrain from aggressive interest rate hikes. While the rand remains vulnerable to volatility, both domestic and international factors influence its performance. Investors will closely monitor the South African monetary policy committee’s and the Fed’s upcoming interest rate decisions, which will provide additional insight into the rand’s future trajectory.
