Rand storms ahead on interest rate bets
The rand has now gained almost 4% against the dollar over the past week, as the US currency comes under increasing pressure.
After reaching R18.18/$ on Monday, the rand strengthened to R17.81/$ by Tuesday afternoon – around its best levels in more than 15 weeks. Last week, the rand was still trading above R19/$.
The local currency is now down only 4% against the dollar from a year ago. At the start of June, it was 26% weaker than a year before. The euro hit its strongest level against the dollar since the start of 2022 on Tuesday.
The dollar is being sold off as investors bet that the Fed won't hike interest rates much further following much cooler-than-expected inflation data recently.
US interest rates are key to the rand. Investors are used to South Africa offering much higher interest rates than the US, which made rand investments attractive in the past. But following aggressive US rate hikes, that differential shrank and interest offered on rand assets now looks less appealing.
The SA monetary policy committee is due to announce its latest interest rate decision on Thursday. Economists are divided about whether it will keep rates unchanged or announce a small 25 basis point hike.
A week later, the Fed will make its interest rate decision. If the Fed decides not to hike, the rand could see more gains. But a hike and a more hawkish stance by the Fed on future increases could dampen the recent rand gains.
Investec economist Annabel Bishop warns that the domestic currency is likely to remain at a high risk of volatility and beholden to the outcome of US data and financial market events.
In addition, fragile local economic growth is also still weighing on the rand, as are political concerns ahead of the 2024 election and worries over the future strength of state finances, Bishop says.
"The BRICS summit and potential physical visit of Russia’s president also hangs over financial market sentiment towards the rand, while concerns are rising against allegations of corruption made against key members of Deputy President [Paul] Mashatile’s family in the press."
Tuesday's rand strength came despite much weaker-than-expected Chinese economic growth data for the second quarter, which was released on Monday. This will weigh on Chinese demand for South African commodity exports, which would typically hurt the rand.
