The rand is trading much weaker against major currencies, driven higher by global and local headwinds.
The local unit hit a low of R17.69 versus the dollar on Tuesday (7 February), recovering only slightly to around R17.55 on Wednesday morning.
According to Investec chief economist Annabel Bishop, the rand’s weakness is largely due to risk sentiments shifting, emanating from markets still seeing inflation risks in the USA.
“While the Fed last week was careful to highlight its rate hikes are not at an end, core measures of inflation are proving sticky and not just in the US,” she said.
“US Treasury Secretary Yellen reiterated this week that she does not expect a US recession, and legislative measures will aid inflation to fall more rapidly, but markets have started to worry about inflationary effects of stronger than expected economies.”
This view was echoed by TreasuryOne, which noted that the stronger-than-expected performance by the US economy spells bad news for emerging markets – especially the rand.
“The fact that the US economy is doing better than any other economy in the world caused the market to flock back into the US dollar,” it said. “This puts pressure on emerging markets. As the market follows the US dollar, it is usually the market EM that loses its shine, and this case is no different.”
“Moreover, the magnifying glass is still on South Africa, which does not bode well for the rand, at least in the short term, due to local problems. We need a sustained break back below R17.50 to open the way for a more significant recovery for the local currency,” it said.
According to Bishop, the rand’s weakness is not only due to sentiments around the US Fed, however, with president Cyril Ramaphosa’s State of the National Address on Thursday (9 February) also adding to tensions.
Markets anticipate little in the way of game-changing reforms from the president, leaving many past priorities unfulfilled and the economic environment deteriorating.
“The rand has weakened on falling electricity supply, lack of broad state support for Eskom’s CEO, and Transnet failing to meet rail and port capacity needs, while the size of the government and its poor governance is feared to increase under the National Health Insurance scheme,” she said.
TreasuryOne said that previous State of the Nation speeches have not made much of a difference on the local currency, but anything to do with Eskom and the ongoing power crisis will be scrutinised – thus, “it could be a bumpy ride this week”, it said.
Looking ahead, the managing director for private clients at Efficient Wealth, Dr Francois Stofberg, said that despite the current weakness, there is room for the rand to still improve in 2023.
Given the South African Reserve Bank’s moves to keep inflation in check through rate hikes over the last year, he said that the strategy is likely to start paying dividends through a stronger rand.
“We believe that the rand can strengthen to at least R16.50 against the US dollar in 2023, although it might appreciate well below R15.50 for brief periods.
“This is not because of a success story in our local economy – load shedding is making that impossible – but because of a slowdown in developed economies, a shift towards emerging markets, a normalisation in global currency markets, and the frontloading done by the SARB to attract capital to our markets,” he said.
As for inflation in South Africa, it should gradually decrease as markets grow more certain about external forces, and supply-based forces are resolved, he said.
By 13h55 on Wednesday, the rand was trading at the following levels against major currencies:
- ZAR/USD: R17.51
- ZAR/EUR: R18.82
- ZAR/GBP: R21.19