Rand on a rollercoaster

South Africa’s currency is expected to remain volatile following a spike in risk aversion in global financial markets last week, with US data set to play a large role in the currency’s movements this week.

This is according to Investec chief economist Annabel Bishop, who said the rand reached R18.65/USD last week due to a spike in risk aversion in global financial markets.

On Monday, 5 August, the rand weakened significantly to its worst level in a month, reaching R18.50 to the dollar. 

This decline was part of a broader global market meltdown triggered by concerns about a potential economic slowdown in the US.

Investors increasingly worry about the possibility of a recession, leading to a risk-off sentiment and a surge in demand for safe-haven assets. This negatively impacted emerging market currencies like the rand.

Markets have since recovered from this turmoil, with most currencies trending back towards the levels seen last week.

“With equities’ markets having become frothy in the lead up to August, a correction was overdue, and the weaker than expected US key labour market data at the start of August provided the catalyst, aided by the ongoing Fed caution,” Bishop explained.

The rand has since subsided to R18.24/USD, tracking back towards the R18.00/USD mark as the currency is fundamentally stronger after South Africa’s national elections and the formation of a new government earlier this year.

However, Bishop warned that the rand is expected to remain volatile, with US data and interest rate movements playing a significant role.

While a recession in the US is still not seen as the most likely case, the highly restrictive nature of the country’s monetary policy has caused US economic activity to slow.

This has brought about a weakening in the US labour market as the Fed has sought to cut interest rates.

Bishop said the Fed fund’s implied futures have factored in a 25 basis point cut at the September FOMC meeting.

The Fed is expected to cut by at least 25 basis points at its next three FOMC meetings and then by 25 basis points at the first four meetings in 2025.

This will reduce the Fed funds rate to -175 basis points by the end of the first half of 2025.

She added that another 25 basis point cut is expected in July 2025 and then a further 25 points drop by October 2025, completing a 2.0% cut.

“While market expectations had proved substantially less pessimistic by the end of last week, which brought stability to the rand and equity markets, US economic data releases will remain key to the financial market indicators,” Bishop said.

This week, the US also sees the publication of its inflation data, with the release of CPI due on Wednesday, 14 August. 

The core measure, excluding food and energy, is expected to tick down to 3.2% from 3.3% in June.

Bishop explained that a lower reading would spur market optimism, allowing for some improvement in sentiment.

A lower reading will likely benefit the rand, while a higher-than-expected outcome for the print would have the opposite effect. 

“Much consequently depends on the economic data release in the US, with the rand remaining at risk of volatility, along with other risky assets, particularly emerging market portfolio assets and equities in general,” Bishop warned.

Despite the weakening from last week, things are looking up for the rand as the currency rode the commodity wave.

RMB experts Keabetswe Mojapelo and Manqoba Madinane said the rand emerged as the best-performing emerging market currency yesterday, as the currency gained 0.55 percentage points against the US dollar on the day. 

They explained that a confluence of ebbing global investor risk aversion and renewed inflows into the industrial and precious metals commodity complex on the day saw USD/ZAR breaking below the technical support level of 18.2658 before rallying to 18.1780.

The move below the 18.26 mark also represented a break below the 50% Fibonacci retracement level from last week’s cyclical peak of 18.69. 

“Even though overnight activity has seen USD/ZAR rebound towards levels around 18.25, we believe that trading activity below the 18.26 50% retracement level still emboldens rand bulls today,” they said. 

“With 18.1780 being a parabolic stop-reverse indicator and a 61.8% Fibonacci retracement level, that makes it today’s technical support level for USD/ZAR.”