Gut-punch for the rand as it hits R19/$
The rand has faced a challenging week, dropping below R19/$ for the first time since late October 2023.
The Bureau for Economic Research (BER) said that the tense geopolitical environment meant that sentiment towards emerging markets soured, with the rand feeling the full hit of risk aversion.
Despite being at R18.30/$ last Friday, 12 January, it reached a high of R19.09/$ by Wednesday, 17 January. The rand was at R19.00 to the dollar by 11h00 on Friday.
The Nedbank Group Economic Unit said that the local currency was weighted down by the ongoing tensions in the Middle East, which have strengthened safe-haven currencies and hurt emerging-market currencies across the board.
Over the last week, the rand weakened against the dollar, euro, and pound by 1.66%, 0.87% and 0.94%, respectively.
The rand’s depreciating against the US dollar was also worsened by expectations of a delayed interest rate cut by the Fed.
The dollar also gained on its peer economies, as strong retail sales and labour market data highlighted the strength of the US economy. This limited hopes of any imminent interest rate cuts.
Outlook
However, looking ahead to the rest of 2024, the rand should start to strengthen against the greenback by the end of the year.
Investec’s base case (47%) projects that the rand will average higher against the US dollar in Q1 2024 (R17.95/$) while remaining elevated during the election season.
The base case then predicts that the currency will strengthen to about R17.70 by the end of the year.
The base case sees modest economic growth, global financial market risk sentiment shifts from neutral to positive, little to no expropriation without compensation, and a short and slow transition to renewables.
South Africans shouldn’t expect much further improvements, with Investec only seeing a 1% chance that the rand will hit R15.00 by Q4 2024.
This would require far higher economic growth (7%), a quick transition to renewables, a rapid upgrade in credit rating back to investment grade, strong property rights and a very short greylisting.
It is actually more likely (8%) that the rand weakens to R21.50, which would come on the back of a lengthy global recession, widespread civil and political unrest, high inflation, South Africa being blacklisted, the failure to transition to renewables, the risk of default and an ANC/EFF coalition in 2024.
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