Rand Merchant Bank (RMB) expects the rand to initially strengthen at the beginning of 2024 and then gradually weaken throughout the year to around R18.50 to the US dollar.
Foreign exchange structurer at RMB Rayno Nigrini told CNBC Africa that the rand’s value will be driven by how quickly the Federal Reserve and the Reserve Bank cut interest rates in 2024.
Nigrini said the rand typically ends the year strong and continues strengthening in January, but this is usually reversed towards the end of the year’s first quarter.
However, this trend may not apply in 2024 as the rand’s value will largely be determined by global and South African interest rates.
According to Investec’s chief economist, Annabel Bishop, the trend has already been broken.
“The domestic currency, which typically experiences a stronger period around the turn of the year due to lower global financial risk-aversion, has not seen much strengthening, as domestic concerns continue to weigh on it,” Bishop said.
Thus, Nigrini said it is much more important to look at events such as interest rate cuts and elections as indicators of where the rand may go in 2024.
If the Federal Reserve cuts rates quicker than the Reserve Bank, the rand should strengthen as South African debt becomes relatively more attractive.
This will attract capital flows into South Africa, supporting the currency.
As soon as the Reserve Bank gives signals similar to the Federal Reserve, indicating that it will begin to cut interest rates, the rand will weaken as local debt becomes less attractive to foreign investors.
Nigrini said that the rand may strengthen as central banks cut rates around the world as investors’ risk appetite increases, resulting in more capital invested in riskier assets in emerging markets such as South Africa.
The other major events to look at are elections around the world, particularly those in South Africa and the US, as they can have a major impact on the value of currencies.
Elections typically bring about additional uncertainty and instability, which will negatively impact the rand as investors will be reluctant to invest in South Africa without certainty about government policy.