Rand relief coming soon

The rand is set to strengthen despite uncertainty surrounding South Africa’s elections, with central banks expected to begin cutting interest rates and foreign investors begin to look for returns in emerging markets. 

This is feedback from director and currency strategist at TreasuryOne, Andre Cilliers, who told 702 that as central banks in developed markets begin to cut rates, money should flow into emerging markets. 

“There is some money flowing into emerging markets. We have seen some strong interest in South African government bonds in particular,” he said. 

He explained that foreign investors are generally interested in South African fixed-income assets as they promise attractive yields with relatively low risk. 

This is compounded by the market expecting interest rates to come down globally, with the Federal Reserve likely to cut before the Reserve Bank. 

The rand is expected to benefit from this as money flows into emerging market assets, including those in South Africa. 

In particular, if the Reserve Bank keeps interest rates high while central banks in developed economies cut their rates, South African assets will become increasingly attractive to investors. 

This is because the yield promised on fixed-income assets, particularly local government bonds, will remain elevated while their counterparts in other markets will have their yield decline. 

Thus, they become relatively more attractive, and more money is allocated to them. 

“The rand is thus in for a bit of a reprieve, and we could see it move lower towards the R18/$ levels,” Cilliers said. 

He also said that he does not expect the election to spell doomsday and won’t have a signifcant impact on the currency’s value. 

Old Mutual Wealth investment strategist Izak Odendaal also recently said the rand is set for an unexpected boost with central banks beginning to cut interest rates and ease monetary policy. 

Odendaal said other central banks largely operate in the Fed’s shadow, with some larger entities, such as the European Central Bank (ECB), having leeway to start cutting rates sooner since inflation has fallen much quicker in Europe. 

He said there is a notable exception to the usual Fed story among emerging markets this time around. 

The big emerging market crises of the past few decades – especially the 1980s and 1990s – were caused by the Fed’s hiking and cutting cycles. 

These cycles introduce volatility, increase debt repayments, and negatively impact emerging market currencies – a recipe for trouble. 

There have been isolated cases of problems, with debt defaults by Sri Lanka, Ghana, Zambia and Argentina, a serial defaulter, but no widespread emerging markets contagion this time round. 

Many emerging economies have adopted floating exchange rates, built up foreign exchange reserves and reduced foreign borrowing.

This makes them more resilient to the Fed’s movements and allows them to cut rates if their local inflation drops sufficiently – without waiting for the Fed to cut first. 

Some emerging markets hiked rates aggressively and early, even before the Fed got going in 2022, giving them a headstart in the fight against inflation.  

These countries, including Brazil, Chile and Hungary, are now in a position to cut rates as domestic inflation has declined, even though the Fed has yet to move lower. 

“As they cut, South Africa’s short-term interest rates no longer seem relatively low in the peer group, and that should take some pressure off the rand,” Odendaal said. 

As its emerging market peers cut their rates, the interest rate differential will increase between them and South Africa’s.

In turn, the yield on their government debt and other fixed-income assets will move lower while South Africa’s remains high – making them relatively more attractive to investors hungry for yield. 

This should result in money flowing into the country, strengthening the rand.