Where Standard Bank sees the rand going in 2024

Standard Bank has the rand beginning 2024 on the back foot as the dollar strengthens. However, as the Federal Reserve cuts rates, the rand will gain back lost ground against the dollar – ending the year at R18.40/USD. 

The bank’s chief economist, Goolam Ballim, explained that South Africa is a very open economy and is thus heavily affected by global economic movements. 

“The global temperature will not be too hot nor too cold but just right. We are almost in a Goldilocks situation,” he explained. 

With global growth expected to break 3% and interest rates to come down with inflation, the global economy is in a better place than it was last year at this time. 

However, there are significant risks ahead that threaten to push the global economy out of the Goldilocks band it is in now. 

Elections around the world, in particular, present risks to this outlook. Ballim expects administrations in several key economies to change, particularly in the US. 

“Elections inject uncertainty and hesitation from investors due to questions around policy, the prevailing regulatory environment, and foreign policy,” Ballim said. 

This spells trouble for South Africa, which has its own election to contend with. 

Thus, Ballim expects the rand to weaken in the build-up to the national election and for a short period after the election as the country digests the results. 

However, the local election will not be the main factor influencing the rand’s value versus the dollar. The decisions made by the Federal Reserve on when to cut rates in the US and how steeply will be the main determinant. 

There is an outside chance that the Reserve Bank will cut rates before the Fed as other emerging market central banks have, but it is more likely that local authorities will follow their US counterparts. 

If the Fed cuts rates before the Reserve Bank, then the rand will strengthen relative to the dollar. Ballim emphasised that this has much more to do with the dollar weakening than the rand outperforming. 

And so, in the second half of the year, while the rand improves relative to the dollar, it will continue to weaken versus the British Pound and Euro. 

The dollar weakening will be due to the yield of dollar-based assets, particularly money market instruments, declining as the Fed cuts rates. Thus, money should flow out of these assets and into those with greater yields. 

South Africa stands to benefit from this as local debt has very attractive yields north of 10% in some cases. 

As global interest rates come down, investors’ risk appetite should increase, and they will begin to search for yield among riskier assets such as South African government debt. 

These inflows will strengthen the rand relative to the dollar. 

However, as soon as the Reserve Bank indicates that it will begin to cut interest rates, the rand will weaken as local fixed-income assets become less attractive to foreign investors. 

Ballim cautioned that this outlook is subject to change as it is impossible to fully predict the impact of events such as the local election as well as the elections in the US.