What it will take to get the rand under R18 to the dollar

 ·20 Nov 2023

The rand has reversed some of the gains seen in recent sessions, pulling back from the route that was taking it to below R18 to the dollar.

However, that doesn’t mean the fight is over, says Investec chief economist Annabel Bishop, who believes the local unit will likely make a few more attempt to breach that resistance level, and may even succeed.

According to Bishop, the rand weakened to R18.44/USD on Friday (17 November), rebuffed after temporarily breaching the R18/$ mark on Wednesday and reaching R17.95/$.

The R18/$ resistance level proved too strong, Bishop said, but the rand is likely to attempt to breach this resistance level “a few more times this year”.

The odds are that the rand will even succeed at this, the economist noted, with the currency likely to run below R18/$ into next year as the global interest rate hike cycle shifts to one of cuts.

“Markets have fully factored out any chance of further US interest rate hikes now, which has bolstered global financial market risk sentiment, and the Fed Funds futures are also increasingly factoring in the expectation of interest rate cuts,” she said.

“That is, no chance of any increase in the Fed funds rate is seen likely (0%) at either of the next two FOMC meetings on 13th December or 31st January, and the following one, on 20th March, factors in around a 30% chance of a 25bp cut.”

This continues to benefit market sentiment, allowing safe haven investment flows to switch into riskier assets – like the rand.

Foreigners were net purchasers of R7.1 billion of SA bonds on Friday for the day itself, purchasing R25.1 billion worth of SA bonds (net of sales) so far in Q4.23, and R20.1 billion year to date (all JSE and Bloomberg settled data).

The rand closed at R18.36/USD on Friday, before the release of the S&P country review of Friday night on SA, and the rand was trading at R18.37/USD on Monday (20 November), little changed as the S&P outcome was as expected, with no downgrade.

The credit rating was left unchanged at BB- and the outlook was stable as South Africa’s strengths remained unchanged – namely exchange rate flexibility, credible monetary policy framework and a debt structure with long maturities mainly in local currency.

“S&P expects private sector energy provision to ease load shedding from 2025, lifting growth and aiding government finances, but warns on risks in freight transport from Transnet and overall on the strain on state finances, with February’s Budget key,” Bishop said.

Globally, the US publishes the last FOMC meeting’s minutes on Tuesday, which will be scrutinized for the perceived softening of the US monetary policy tone, seen to move from less hawkish towards dovish at the last meeting.

“Also due out this week are various gauges of economic activity in the US, which can also have an impact on global financial market sentiment and hence the rand, and we continue to believe the rand will trade below R18/$ next year,” she said.

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