Hidden force boosting the rand 

While still not good, improved economic data from China has boosted the value of the rand as investors see increased demand for local commodities from the world’s second-largest economy. 

This is feedback from Stanlib chief economist Kevin Lings, who gave an overview of South Africa’s apparent economic resurgence over the past few months. 

While many have focused on polls predicting the outcome of the country’s national election, Lings said other factors are behind the country’s improved economic performance. 

These include positive reforms at state-owned enterprises (SOEs), particularly Transnet’s swift turnaround and the expected improvement in service delivery during the run-up to the election. 

South Africa’s longest period without load-shedding since 2021 has also boosted its financial markets. 

However, Lings said there is a hidden factor behind the rand’s appreciation versus the US dollar over the past few months. The currency has strengthened just below 5% compared to the greenback. 

This factor is the steady improvement in economic data from China, suggesting the world’s second-largest economy may come out of its post-pandemic slump. 

“It’s not as if China is doing fantastically well,” Lings said. “It’s just that at the end of last year, China seemed to be in significant trouble, but during the course of this year, they’ve initiated a number of reforms.”

Overall, these reforms have improved investor confidence in China and have stimulated its economy. 

“That’s helped to get a better feel around Chinese economic performance during the course of this year and into next year,” he said. 

This improved confidence in the Chinese economy has lifted commodity prices as it is the largest importer of many of the world’s minerals. 

As a large commodity exporter, this benefits South Africa, with expected improvements in foreign currency earnings and economic growth, boosting the rand’s value. 

The rand may get another unexpected boost in the coming months, with some central banks looking to cut interest rates, potentially making local fixed-income assets, particularly government debt, more attractive to investors.  

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined why some emerging markets may cut interest rates before the US Federal Reserve does.

Odendaal said there is some hope for the local currency in the near future as its emerging market peers appear set to cut rates even before the Fed. 

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

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.