The rand has weakened considerably over the past few weeks due to a strong dollar, geopolitical tension, the local 2024 election, and South Africa’s dire fiscal situation.
TreasuryONE director and head of market risk management Wichard Cilliers said the weakening of the rand over the past month could be attributed to numerous factors.
Cilliers told Daily Investor that the dollar has risen just shy of 3% in 2024, as interest rate cut expectations out of the US have been tapered back.
In addition, “the geopolitical flair-up with the problems in the Red Sea and the attacks on ships in the region has caused a risk-off scenario”, he explained.
“Locally, the problems with our ports continue to cause worries as this impacts our terms of trade as we cannot get exports out.”
Furthermore, commodity prices are under pressure as there is still a lack of demand as the world struggles with higher interest rates.
Cilliers explained that the labour market in the US is still in a healthy space, and with the geopolitical tensions that have flared up and shipping costs that have shot up again, the potential that we have seen for low inflation has declined.
“The higher-for-longer rhetoric from Fed Chair Jerome Powell looks all the more likely, and the first interest rate cut out of the US, which was expected for March, has now been pushed back,” he said.
“A lot can still change, but the USD is trading on the front foot, albeit a little weaker today [25 January 2024].”
While the rand has bounced back slightly in anticipation of inflation and interest rate data being released this week, it is still trading at around R19/USD.
Efficient Group chief economist Dawie Roodt said it is also important to highlight that the rand is always undervalued.
The extent to which the rand is undervalued differs depending on how it is calculated, but Roodt estimates that the currency is usually around 50% undervalued to what it should be.
“If you go on historical trends, then the rand should be trading at about R16.50 to the US dollar at the moment,” he said.
Over the past few days, the rand has been trading at around R19/USD – far below what is considered fair value.
Roodt told Daily Investor that this means the currency is not only undervalued based on historical trends but even more undervalued than usual.
“The current pressure on the currency is that, of course, there was a stronger US dollar,” Roodt said.
While this is an important factor, well-known investor Karin Richards said on 22 January that a 4.4% loss for a liquid, open currency like the rand in 3 weeks is “no small matter”.
“And it’s not simply dollar strength. The US Dollar Index is +1.84%. The rand is telling us something, and I’m not sure I want to hear it,” Richards said on social media.
Roodt said another factor leading to the rand’s weakness is some concern about South Africa and its upcoming election.
The 2024 elections, wherein the ANC’s majority is at risk for the first time since the party took power, will bring a lot of uncertainty, which markets usually do not like.
Cilliers also highlighted the 2024 election as a potential risk, saying it could cause some volatility.
In addition, the US elections will also cause volatility, “as it seems a Biden versus Trump run again”, Cilliers said.
“The rand has moved in conjunction with other emerging markets this year, and we expect this to continue, but any significant event can change this in a whimper,” he warned.
Another important factor putting pressure on the currency is that South Africa is getting closer to the 2024 Budget Speech, “and the fiscal accounts look absolutely horrible”, Roodt said.