Rand on the rise

The rand is set to remain strong for the rest of the year, but South Africans should expect to see some volatility.

Investec chief economist Annabel Bishop said the rand had gained momentum over the past few days and is now approaching the R17.70/USD key resistance level. 

This strength has largely been driven by the weakening US dollar ahead of the Federal Reserve’s anticipated interest rate cut on Wednesday, 18 September.

Bishop explained that market expectations for a US interest rate cut have intensified, with futures contracts now pricing in a potential 40 basis point reduction. 

While the initial cut is still widely expected to be 25 basis points, there’s growing confidence that it will occur. 

In addition, the November FOMC meeting is factoring in a 50 basis point cut, reflecting the market’s optimism about the overall trajectory of US interest rates.

The rand has benefited from the widening interest rate differential between South Africa and the United States. 

While the South African Reserve Bank (SARB) is expected to cut rates by 125 basis points over the next twelve months, the market’s expectations for the US Federal Reserve are much more aggressive, with a potential 250 basis points of cuts anticipated.

The SARB has been in a hiking cycle since the start of November 2021, which many experts believe will come to an end at the Monetary Policy Committee’s (MPC) September meeting.

Since the start of the current cycle, the MPC has implemented a cumulative 475 basis points of hikes, bringing the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.

Until recently, central banks around the world have been concerned about cutting interest rates too quickly, adopting a gradual approach. This has disappointed markets this year, as US interest rate cuts have not occurred sooner. 

However, the tide has turned now, with several central banks expected to enter a cutting cycle before the end of 2024.

Bishop said the recent moderation in global risk aversion, fueled by the prospect of a US interest rate cut, has also supported the rand. 

The currency has averaged R18.10/USD for the third quarter of 2024, and analysts continue to forecast an average of R18.00/USD for the remainder of the quarter. 

However, volatility is expected to persist due to ongoing US data releases.

Looking ahead, analysts anticipate the rand to strengthen further, potentially reaching R17.00/USD next year and breaking through this level by 2026. 

This forecast is based on the expectation that the US will implement a more aggressive and prolonged interest rate cut cycle than South Africa.

Bishop said domestic factors have also contributed to the rand’s resilience. Improved economic growth and the absence of load-shedding in recent months have boosted investor sentiment. 

“The turn in sentiment towards South Africa post-election and the formation of the GNU cannot be underestimated either, as it has provided a stabilising influence on the rand,” Bishop said.

She added that this can be seen in the significant foreign capital inflows South Africa has experienced, with foreigners purchasing R18.5 billion of local bonds on a net basis since the election.

In addition, Eskom has made significant progress in improving its generation capacity, reducing the need for load-shedding and saving millions of rands on diesel. 

Eskom recently celebrated 170 days to date with no load-shedding, and has saved R12.5 billion in expenditure on diesel, as it has used its open cycle gas turbines less as capacity has improved at its power stations.

Bishop said the utility’s efforts to reduce unplanned capacity losses and improve energy availability have been instrumental in stabilising the country’s power supply.

“The recent willingness of government to now consider all public submissions on key passed or pending bills has also come across positively, supportive of a full public participation process which had been seen to be lacking in key areas,” she added.