Rand Report: Rand Recovery After Sustained Losses

Sable International - Sable International

https://www.sableinternational.com/

Last week, the South African Rand strengthened against 17 of the top 19 currencies, making it the best performer amongst the ones monitored. This rally occurred without any particular trigger but can be attributed to the currency being oversold in previous weeks. Additionally, the fear of contagion in the banking crisis has slightly calmed down, leading to an improved risk sentiment in the market.

However, there were some concerns on the local front. Inflation rose for the first time in four months due to higher food costs, which affected cash-strapped consumers. Additionally, consumer confidence numbers dropped from a two-year high due to loadshedding and inflation, recording a consumer confidence index of -23.

Globally, the US Fed interest rate decision was the main focus, with the market previously expecting a 50 basis-point (bps) hike before the recent banking crisis. However, due to the higher interest rate environment causing strain on the financial system, the US Fed only raised rates by 25 bps, resulting in the USD being sold off slightly.

This week, all eyes will be on the US PCE data, which measures inflation and is the preferred method used by the US Fed. If the data comes in lower than expected, we expect the USD to drop, whereas if there is an uptick, the USD will most likely strengthen.

For local data, the South African interest rate decision on Thursday will be closely watched, with the market expecting a 25-bps hike. SARB Governor, Lesetja Kganyago, will need to balance maintaining higher real interest rates compared to the rest of the world to keep the ZAR attractive while also combating inflation by increasing interest rates. If they raise rates by more than 25 bps, the ZAR will strengthen, whereas if they do not hike rates, there will be a big sell-off in the currency.

In conclusion, the South African Rand's recent strength can be attributed to the currency being oversold in previous weeks and the slight calming of fears regarding the banking crisis. However, local concerns such as rising inflation and dropping consumer confidence numbers should not be ignored. Furthermore, global events such as the US PCE data and the US Fed's interest rate decision will have a significant impact on the ZAR's performance in the coming weeks.