Sensitive rand still under pressure

The rand is currently weak due to global risk aversion and delayed interest rate cuts. While the currency will remain volatile, a positive election outcome could strengthen it in the long term.

Investec chief economist Annabel Bishop said the rand has remained constrained by risk-averse sentiment.

This sentiment comes as the US is stretching out the launch of its anticipated interest rate cut cycle, which negatively affects emerging markets (EM), their currencies and their capital flows.

Volatility has been significant in emerging markets, including currencies, as the Fed funds futures have seen probabilities continuously fall for an early US rate cut this year. Rate cuts are now only expected in the fourth quarter of 2024.

The Institute of International Finance (IIF) noted in its Global Debt Monitor report this quarter that debt in EMs has grown to $105 trillion, doubling over the past decade, adding to concerns around global financial stability.

The largest growth in EM debt has come from India, Mexico and China. For South Africa, the IIF noted the country needs an improvement in investor confidence after a lengthy period of capital flight. 

Bishop said global financial flows into EMs will benefit the rand when the US interest rate cut cycle begins, as has historically been the case. 

She expects the rand to pull towards its purchasing power parity of R15.00/USD over the next few years.

However, Bishop noted that the expected case rand outlook also depends on the outcome of South Africa’s national elections on 29 May this year. 

The expected case is that the ANC will get around 45% of the vote and form a national coalition with the IFP, ACDP, and some smaller parties if necessary.

Bishop noted that investor sentiment is expected to collapse after the election if an ANC/EFF coalition were to be the outcome.

She said this coalition would likely see the rand depreciate sharply, bond yields spike, and financial instability ensue.

Trade performance will also be key for the rand, with the terms of trade weaker for the first quarter of 2024. 

Load-shedding was higher in the first quarter of this year than in the fourth quarter of 2023, while port congestion eased but was not cleared, and weak commodities prices added to the malaise for the rand. 

South Africa’s interest rate cycle has also been delayed due to stubborn inflation outcomes.

The South African Reserve Bank’s recent Monetary Policy Review highlighted that it currently expects the country’s interest rate cut cycle to start in the last quarter of next year.

This expectation prompted some earlier rand strength as the delay of South Africa’s interest rate cut cycle well beyond the start of the one in the US will widen the interest rate differential between the two countries, benefiting the rand.

However, Bishop warned that the rand will remain volatile and sensitive to US data releases.

She said any change in US interest rate expectations and other global financial market developments would significantly impact the rand’s strength.