Rand takes sharp turn for the worse
The old adage about the higher things climb, the harder they fall, rang true for the rand on Monday (2 February) as the local currency’s recent rally came to a sharp end.
After hitting fresh highs against the US dollar in January, trading as strong as R15.65/$ last week, a rebound in the dollar sent the rand back above R16.30/$ and out of its fair-value range.
According to Investec Chief Economist Annabel Bishop, the sharp turnaround was not unexpected for the highly volatile domestic currency, particularly as its rally was driven by external factors.
While local sentiment and positive economic data were supportive of a stronger rand, the strength seen last week was largely due to a weaker dollar and investors flooding into gold and precious metals.
The weak dollar was due to heightened global uncertainty around the Trump administration, as well as Washington’s targeting of the US Federal Reserve and its chair, Jerome Powell.
Trump announced that Kevin Warsh would succeed Powell at the central bank when the latter steps down in mid-May, which roiled financial markets.
Bishop said that markets anticipated that Warsh—a fiscal “dove”, countering the hawkish Powell—would drive the Fed to much looser monetary policy and quicker rate cuts.
“Expected incoming Chair Warsh has been a firm critic of the Federal Reserve Bank, highlighting that its ‘outsized role and underperformance have weakened the important and worthy case for monetary policy independence’,” Bishop said.
Warsh has also sought to shrink the Fed’s reach, and criticised the bank’s reliance on forward guidance in its decisions, saying that it has “little role to play in normal times”.
As a result, the US dollar strengthened by 1.0% in the last few days of January.
Meanwhile, the rand weakened by 2.9% against the dollar over the period as appetite for risk-taking moderated and uncertainty around the new Fed chair rose.
Gold loses its lustre
Also working against the rand is the significant drop in the gold price, which sank from record highs over $5,500 an ounce to $4,575 an ounce.
Bishop called the gold price crash the “biggest correction in over a decade”, adding that the price had been in ‘bubble’ territory for some time.
“Along with gold, silver and AI stocks have also suffered substantial frothiness, and the collapse in these markets has driven further negative investor sentiment, in overheated markets which are now seeing corrections affect risk-assets too,” Bishop said.
The sell-off also impacted South Africa’s equity holdings by non-residents, with total sales net of purchases settled data at -R7.4 billion, and net foreign holdings of South African bonds at -R44.7 billion in the last two trading days.
The JSE has dropped to 117,680 from its historic high of 125,249 last week, the largest fall since 2020, as South Africa’s stock market is caught in the global sell-off of high-risk assets and dragged lower by precious metals.
“With the correction in the markets, particularly precious metals, reverberating into risk assets to a degree over the last two days, and markets still feeling the correction today, one week implied rand volatility has elevated to 14.5% from 10.4%,” Bishop said.
With rand trading back around R16.00 to the dollar, Bishop said Investec’s forecast of the currency averaging around R16.40 for the quarter is coming into view.
In the group’s current baseline scenario plotting, the rand is expected to average higher in the second quarter, at R16.55/$, R16.60 in Q3 and then R16.45 in Q4.
Over the medium term (to 2028), the unit is expected to remain within a quarterly average range of R16.10 to R16.50, outside the fair value range of R13 to R16/$.
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