Why the rand is back above R19 to the dollar

 ·22 Apr 2024

The South African rand has had a less-than-ideal time in the markets, starting the new week squarely on the back foot and stuck above R19.00 to the US dollar.

While the local unit managed to strengthen this month thanks to a turn in sentiment, adverse conditions have reared their ugly heads and sent it in the opposite direction.

Broadly, the main culprits behind the rand’s weakness are:

  • Markets souring on the US Fed pushing interest rate cuts back
  • Global tensions over the Middle East
  • Local uncertainty around the 29 May elections

According to Investec chief economist Annabel Bishop, the rand has historically strengthened during US interest rate cut cycles, along with other emerging market currencies.

However, the ongoing delays in the advent of the US rate cut cycle have caused the domestic currency to track somewhat weaker in response.

“The rand remained around R19.00/USD over the course of last week, after the US saw a week of data which did not dissuade financial markets from their view that the US will only begin cutting its interest rates in Q4.24 with certainty,” Bishop said.

“The rand consequently remains weak in disappointment, with market expectations over the course of this year having pushed out the timing for the first US rate cut from Q1.24 to Q4.24, and risks of no cut this year also now present.”

According to Old Mutual Wealth Investment Strategist Izak Odendaal, expectations for a “flood” of interest rate cuts in 2024 have become a trickle.

“Since there are lags between changes in interest rates and the direction of inflation, central banks do not need to wait for inflation to be at target to cut rates. However, they do need confidence that inflation is heading in the right direction and will remain on target once it gets there.

“The current environment means such confidence is in short supply. Fed Chair Jerome Powell admitted as much last week, saying that it will likely take ‘longer than expectedl to achieve that confidence.

Other factors

The rand is also being knocked back by the other two big hitters.

A potential escalation of the Middle East conflict could have a “strong effect” on limiting growth, Bishop said. Escalations could also raise oil prices and inflation, triggering tighter monetary policy from central banks and increasing the risk of no relief this year.

While markets have seemingly pulled back from pricing oil above $90 a barrel last week to around $86 a barrel this week—as the risk premium has lowered—oil prices are still significantly higher than they were at the start of the year, with some analysts expecting a move over $100 a barrel.

This feeds into the main contributing factor affecting the rand.

Domestically, risk aversion is high ahead of the May 29th elections. While this was attributed to the rand’s weakness in the last week or so, economists were quick to point out that it’s not a major factor.

Nevertheless, markets continue to greatly fear an ANC/EFF alliance, given the EFF’s radical nationalisation policies, which would eradicate private sector property rights, Bishop said.

Until the elections have passed and the path forward is clearer, the elections will continue to be a factor.

Read: It’s all about ‘what comes next’ for South Africa

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