During the past two weeks, the South African Rand has been gaining ground against the US dollar, although the pair has been in a downtrend for the past couple of months. A strong US dollar and concerns about emerging markets have contributed to the rand’s sell-off. Its value is largely dependent on risk sentiment, which means traders and investors can’t afford to ignore the uncertainty surrounding global economic and political developments.
The South African Reserve Bank is responsible for price stability, but its decision to hike interest rates has a direct impact on the rand. The bank’s rate hikes are aimed at controlling inflation. However, the bank may slow down the rate hikes if inflation starts to moderate. The Bank has been in a tightening cycle, which started in September with a rate increase to 6.25%. If the inflation rate begins to ease, the Rand’s value could be pressured.
The rand’s recent strength was partly driven by stronger-than-expected domestic data, which supported the currency’s rally. In addition, the USD/ZAR was buoyed by higher risk appetite for emerging-market assets, while the Chinese economy was viewed as having a strong outlook. But the recent tariff escalations have suggested the rand is in for a rough ride.
In the short term, the US dollar is expected to strengthen as the Federal Reserve continues its aggressive monetary policy. The Fed’s target policy rate has risen from a near-zero level in March 2022 to a range of 3.00%-3.25% today. The Fed’s rate hikes have triggered a repricing of assets around the globe. This is causing investors to shift their investments to higher-yielding assets, including the US Dollar and other emerging-market currencies. Nonetheless, the US Dollar Index has risen over 15% this year, while the Australian and Pound have both gained more than 10%.
The US and China are battling over trade, and the resulting tensions have also contributed to the rand’s sell-off. President Donald Trump threatened to impose 50-to-100 percent tariffs on Chinese goods, which would damage the country’s economy. The United States plans to scrap waivers for Iranian crude oil purchases, which will also sour sentiment for the rand. The US economy will also release its latest GDP figures, which is expected to grow by 2%. This will provide the Fed with guidance for its interest rate strategy for the rest of the year.
Meanwhile, the World Bank has granted South Africa a R8 billion loan for renewable energy. This is part of a larger plan to transition the decommissioned Komati plant into a renewable station. In addition, the bank has awarded the country a R183 million grant to fund its Energy Sector Management Assistance programme. The renewable energy plan is considered an optimistic step towards the country’s economic future.
There are a number of factors that could affect the rand this week, but the market is expecting that the new cabinet and other key appointments will be announced before the end of the week. The markets are eager to know who will be the new finance minister, as well as what size the cabinet will be.
