Rand shakes off Russia blues – eyes a path back to R18 to the dollar
Sentiment towards South Africa is slowly shifting, with markets embracing talks between the government and business leaders to address the energy, logistics and crime crises – while the state puts some substance behind its claims of neutrality towards Russia.
According to Investec chief economists Annabel Bishop, these developments – along with a brighter load shedding outlook – have caused the rand to recover some of its losses from the past few weeks.
The unit was trading at R18.55 to the dollar on Monday (12 June), a much better position than the R19.91 record it hit in recent weeks.
It is trading at its strongest levels since mid-May 2023, before the United States Embassy’s accusations that South Africa supplied weapons to Russia.
“The rand has pulled stronger as the South African government seeks to dampen down its relationship with Russia, to strike a neutral balance,” she said.
“Additionally, the state has been proactive in working to resolve the electricity crisis, while big business and the presidency have established a partnership initiative to remove obstacles to inclusive economic growth and job creation.”
In addition to local developments, the markets have also cheered the likely pause, if not end, to the interest rate hike cycle in the US this week.
“The market is not pricing in a full rate hike of 25bp in any of the upcoming three FOMC meetings of 14th June, 26th July and 20th September,” Bishop said. “From November, market expectations turn for the US, as interest rate cuts are expected.”
With a two- to three-quarter lag between a change in US interest rates and the impact on the economy, the US is largely expected to pause its rate hike cycle, bolstering the rand, which was suffering from ongoing erosion of the interest rate differential, Bishop said.
The good news could also continue.
“The rand was heavily oversold on levels in May, and June’s recovery could see momentum towards R18.00/USD, while US interest rate cuts are likely to strengthen it further, and indeed the anticipation of these cuts ahead of time,” Bishop said.
Thus, the playing field is primed for a stronger rand if the momentum can be carried. This would require Eskom to keep load shedding at bay, for the government to keep Russia – and the threat of secondary sanctions – at arm’s length while working towards the necessary reforms in crisis-hit sectors.
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