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Rand Strengthens Despite Global Headwinds

Published 2023/09/26, 15:47

The Rand had a strong week compared to the G10 currencies. Gaining between 0.34% against the New Zealand Dollar (NZD) and 2.82% against the Swiss Franc (CHF), it also did well when compared to other BRICS currencies. This has been particularly impressive during a week of US Dollar Index (DXY) strength, which is at a multi-month high – the highest level since November 2022. Furthermore, the strength has been notable given the risk-off conditions in the equity markets in the past week, which often tend to drag the Rand and other emerging currencies with it.

The Rand is currently trading at R22.96 to the Pound and R18.81 to the Dollar, showing some strength to recover from the highs of last week, which sat at around R23.66 to the Pound and R19.08 to the Dollar.

On Wednesday, the August inflation data came out at 4.8%, in line with market expectations and still within the South African Reserve Bank’s (SARB) target range of 3-6%. This means that there were no shocks to the upside that would require urgent fiscal intervention. Following the inflation data, the SARB kept the interest rates stable at 8.25% – electing to push out the decision – perhaps until after the Medium-Term Budget Policy Statement scheduled for 1 November, where Finance Minister Enoch Godongwana will set government policy goals and priorities. These include forecasting macroeconomy trajectory and projecting the fiscal framework over the next three years by outlining spending and revenue estimates, amongst others.

The US Federal Reserve kept the interest rates stable at 5.5%, which further added tailwind to the Rand, as further capital inflows to the United States were prevented by not increasing the yield attainable on the US Dollar.

The SARB hinted that they are expecting one further rate hike before the end of the year, while further hinting that there may be fewer reductions in 2024 when compared to previous predictions. If local interest rates increase further, it will likely be the last as pressure is on to reduce interest rates to ease mortgage and car finance rates as well as prevent the stagnating of the economy.

Another notable talking point is the potential change in taxation, with the treasury contemplating a VAT hike of 2% to combat the increasing budget deficit and offset some of the increased government spending. This could have a large change in disposable incomes which could lead to decreased consumption and slow growth.

There has been some strong local strength, however, there are some concerning signs with an increasing budget deficit exacerbated by increased spending and lower tax revenue, high debt service costs and a stagnant economy. On the other hand, the Rand is an undervalued currency by almost all metrics, however, there are very real risks which need to be straightened out before the sentiment improves.

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