Worst is over for the rand – for now

The rand has been steadily strengthening against the US dollar for the past few days and has dropped to below R19/USD after weeks of trading closer to R20/USD.

Director at Citadel Global Bianca Botes said the rand gained nearly 4% in the past five days off the back of “some positives that filtered into the market”.

This is a welcome relief, she said, as the currency had neared R20/USD just a week ago.

Some of these positives included major financial players such as Goldman Sachs, JP Morgan and other heavyweights expressing their appetite for “cheap” South African assets. 

Risks around the country’s relationship with Russia also dissipated, as the “concrete” evidence against South Africa supplying weapons to Russia “seems not all that concrete after all”.

“In addition, the Presidency and key private sector players met on Tuesday to map a way forward that would see government and business actively work together to overcome some of the major challenges facing the South African economy,” she said.

Investors also reacted positively to the country’s latest GDP data, indicating that South Africa’s economy grew by 0.4% in the first quarter of 2023 and avoided a technical recession.

South Africa experienced some relief from stage 6 load-shedding this week, which investors could have seen as a positive sign.

The weakening US dollar, which lost nearly 1.0% against the euro, pound, and yen after weekly jobless claims climbed to an 18-month high, also had an effect. 

Wayne McCurrie from FNB Wealth & Investments said the rand’s recovery could be a sign that “the worst might be over”, but other experts have warned that South Africans should not get their hopes up just yet.

Botes said challenges related to the power crisis and inflation dynamics continue to impact the rand, and future interest rate decisions by the South African Reserve Bank (SARB) “will play a crucial role in shaping its trajectory”.

TreasuryONE director and currency strategist Andre Cilliers told 702’s The Money Show that he did not see the rand’s improvement as a “turnaround”.

He said it is important to remember that the rand’s severe weakening over the past month was “the perfect storm”. 

South Africa has been facing consistent stage 6 load-shedding, the US ambassador had accused the country of supplying arms to Russia, and South Africa had been greylisted only a few months prior.

These factors pushed the rand to “ridiculous levels” and saw investors “jump on the bandwagon”, leading to a rapid sell-off of the currency.

As more positive information about the country and its economy has come through, and the President has been in talks with international leaders, the rand has steadily been returning to fair value.

However, Cilliers said this improvement would not be maintained unless there is more confirmation about the positive news stories that have been circulating about South Africa.

“We need a press conference by our President or by one of the ministers in the Presidency or the Minister of Foreign Affairs, stating that the BRICS conference for August has been moved to a different location,” he said.

The country also needs confirmation from Eskom that this week’s lower load-shedding levels will last. This will give South Africa a sustainable path for a downward trend of the rand to lower levels, said Cilliers.

“But if we don’t get the follow-through, then we will just gently drift back into weaker levels,” he warned.

Another factor influencing the rand’s outlook is US inflation data and the Federal Reserve’s consequent interest rate decision.

“The signs of weakness in the US labour market are reinforcing the likelihood of a pause in rate hikes by the Fed, but next week’s US inflation numbers are going to be key,” said Cilliers.