Rand takes a hit as the dollar rallies

The land lost 1.15% of its value versus the US dollar on Monday (29 July) as markets look ahead to the coming rates decision by the US Fed and worries over the conflict in the Middle East escalating sends investors into safe havens at the expense of emerging markets.

By 16h30 on Monday, the rand was trading at R18.50 to the US dollar, a markedly weaker position than its opening start to the week at R18.27 in the morning.

Market analysts pointed to rising tensions in the Middle East and fears that more countries will be pulled into the conflict as the reasoning behind the move into save haven assets and a risk-off environment, boosting the dollar.

Investors are also looking to the meeting of the US Federal Reserve this week for indications on its next move on rates. The Fed is currently expected to hold on rates again, but lay the foundation for cuts in September.

According to Investec chief economist Annabel Bishop, the rand has been running stronger in recent weeks as positive market sentiment towards South Africa persists on the increased likelihood of a better outlook, and this is reflected in South Africa’s JSE and bond markets

“The rand has been volatile this year, negatively impacted by both international and domestic events, with the domestic currency also affected by commodity prices, but the national election outcome is seen as a big shift for South Africa,” she said.

“The rand would be much stronger now if South Africa’s Reserve Bank had not shown a dovish tilt to its tone at the last MPC meeting, likely running below R18.00/USD ahead of the US September rate cut without one expected in South Africa.”

While the domestic currency has been undermined recently by SARB dovishness, without positive market sentiment towards South Africa the rand would likely be markedly weaker, she said.

However, the outlook for the currency looking ahead is much brighter.

Using Investect’s Even Risk scenario modelling, Bishop said that there is a 64% likelihood of the rand attaining the forecast in the group’s base case scenarios, which would see the currency move toward R18.00 to the dollar by the end of the third quarter (end-September) and continue to strengthen to around R17.70 by the end of the year.

But the economist warned that, even though the rand has strengthened from its position ahead of the national election (circa R19.30), it still remains far weaker than a year ago, and substantially weaker than in 2022.

“Looking forward, the domestic currency is likely to be held back from rapid strength by the approach of the interest rate cutting cycle in September, aligning with the start of the US cut cycle, and so not providing a widening in the interest rate differential,” she said.

Both the US and South Africa are now expected to begin their interest rate cutting cycles in September—on the 18th for the US and the next day, 19th September, for South Africa—maintaining the narrowed differential between the countries’ interest rates.

“Part of the impetus for rand strength has been removed by the expected near-simultaneous start to the US and South African interest rate cut cycles, although neither is certain. The rand likely would see marked strength on a delay for rate cuts in SA,” Bishop said.

By 17h00 on Monday, the rand was trading at these levels against the dollar:

• ZAR/USD: R18.50 (+1.15%)
• ZAR/EUR: R19.98 (+0.55%)
• ZAR/GBP: R23.72 (+0.85%)

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