Rand breaks through the R18 level to the dollar
One hour before the inauguration of President Cyril Ramaphosa for a second five-year term as head of state, South Africa’s currency had broken through the R18 level against the US dollar for the first time in almost a year, trading at R17.94.
This time around, rand strength was not based on any relative weakness in the US dollar’s value, as the dollar index (DXY) strengthened by 1.3% to 105.2 since the beginning of March. Leaving most of the world’s key currencies floundering.
Between the first of March and 19 June, only the Brazilian real has managed to outperform the rand, with even the Euro, the Chinese yuan and the Japanese yen taking a hit against the world’s dominant currency.
Exhibit 1 | Selected currency movements against the US dollar between 1 March and 19 June 2024
Source: X-rates. Data as at 19 June 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.
It is no coincidence that the renewed strength of South Africa’s currency occurred in the immediate aftermath of free and fair elections that witnessed a historic shift to a coalition government consisting of the two dominant political parties (the ANC and the DA), as well as several smaller parties.
The upshot of domestic and international investor sentiment over the latest election results is a belief that the economic reforms that had been initiated by President Ramaphosa would now be given impetus, due to the DA’s commitment to market-friendly policies.
First and foremost, will be a more concerted effort to expand the agenda of the National Logistics Crisis Committee, which has been tasked with improving the efficiency of the country’s railways, harbours and roads. Fortunately, this Committee embodies a partnership between the public and private sectors, and it can delve into successful case studies of public sector management that exist in the Western Cape.
Turning to the prospects for the rand over the medium term, several analysts expect a larger measure of stability in the months ahead. Several leading financial institutions, including Investec, Absa, UBS and Credit Agricole expect the rand to remain firm, with year-end projections of between R17.50 and R17.80 to the US dollar.
With weak retail trade sales in May having been reported in the US and global inflation continuing a downward trend towards pre-Covid levels, the chances of interest rate cuts in the US and Europe have improved. Further rand strength seems to be on the cards, which should drive down domestic inflation further and may even lead to a repo rate cut as early as July.
