The rand has seen consistent gains against the major currencies over the last two weeks, and has now appreciated to levels around R16.80 after trading near its all-time R19-lows in early April.
“For a long time, we have held that the rand is too weak and should be strengthening,” said Dr. Francois Stofberg, senior economist at the Efficient Group.
“Using a measure of the average undervaluation of the rand’s purchasing power parity (PPP), and considering all the negative sentiment towards South Africa, directly and indirectly, a ‘normal’ closer to what we would expect would probably be around R16.50,” he said.
Stofberg added that the rand could see further appreciation if the government focuses on a number of ‘pro-business’ moves.
“If South Africa could do a couple of things better – including prudent fiscal management and/or a pro-business ideology – the rand could even appreciate to R15.50.
“Nevertheless, the recent moves in the rand were caused more by external factors, than by internal ones.”
This was echoed by Bianca Botes, executive director at Peregrine Treasury Solutions, who said that the rand is being boosted by dollar weakness.
“There is little change in the market as the dollar continues to lose ground, closing in on 3-month lows as the relief rally bolsters risk appetite and commodity-driven currencies,” she said.
“The rand is basking in the dollar weakness, reaching fresh highs in the overnight session and starting the day at R16.72.”
The end of the run?
Upgraded forecasts from Goldman Sachs suggest the South African unit may already have peaked after a three-week rally against the dollar and pound.
“Since late April, the rand has led a broader emerging marketFX rally, appreciating by more than 10% versus the dollar,” said Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs.
“But, as we have long observed, South Africa’s longer-run combination of weak growth and current account dynamics have underpinned a multi-year trend of FX weakening,” he said.
Local traders are more bullish on the currency, however.
With no significant data due locally until Thursday, investors’ focus is now on the US central bank’s two-day meeting, starting later in the day, for any forward guidance as the economy gradually starts showing signs of recovery, Reuters reports.
“It could very well come down to Wednesday and what the Fed see as a path forward,” said Standard Bank chief trader Warrick Butler in a research note.
“More easing in terms of long-term low/zero interest rates and continued support for the economy and this strong support area in the rand of R16.50/65 could well give way and open another floodgate move back to R15.50.”
The rand was trading at the following levels against the major currencies at 13h50 on Tuesday (9 June):
- Dollar/Rand: R16.71 (+0.21%)
- Pound/Rand: R21.18 (-0.24%)
- Euro/Rand: R18.85 (+0.07%)