US weakness is Rand's strength as it breaches R17
The local currency is now at its lowest level since at least September last year as it dips below R17 to the dollar.
Image: Ron | IOL
The local currency is now at its lowest level since at least September last year as it dips below R17 to the dollar.
This comes on the back of a weaker dollar, as the markets await a decision from the Federal Reserve on whether to cut the interest rate next week.
The US Fed faces a difficult decision given the scarcity of official government data over recent months, following what was the longest government shutdown in history. This information started to flow again in recent weeks.
Andre Cilliers, currency strategist at TreasuryONE, said that the currency opened on Thursday at R17.06 this morning, having traded at R17.02 overnight in the US. This comes as recent US economic data cements the case for an interest rate cut, benefitting the euro.
Bianca Botes, director at Citadel Global, said the rand remained supported by the softer dollar and was trading at under R20 to the euro and below R23 to the pound.
Bloomberg on Wednesday reported that a gauge of expected volatility for the rand versus the dollar is at its lowest level since the turn of the century, suggesting traders expect little upheaval for the South African currency as the year draws to a close.
The rand has long been one of the most volatile emerging-market currencies.
Over several decades, it has been sensitive to changes in global risk appetite, commodity cycles, domestic politics and interest-rate differentials.
For example, the rand has ranged between under R12 to the dollar and almost R20 in the past seven years.
The stronger currency may not be good news for the just more than two million foreign travellers who may visit South Africa this month – based on last year’s figures.
It all depends on whether they have been budgeting in dollars, in which case, their trip just got a bit more expensive.
Assuming a mid-range one week visit, that would cost about $1 400, this now translates into about R24 000 whereas, a year ago, the same trip would have been R25 200.
The rand’s sharp swings have often followed periods of uncertainty, including elections, shifts in fiscal policy, and global stress events such as the 2008 financial crisis and the early stages of the COVID-19 pandemic.
Investors have therefore tended to price in a premium for rand risk, and the currency has frequently been used as a proxy trade for broader emerging-market sentiment.
Historically, the rand’s volatility has also been linked to South Africa’s reliance on portfolio inflows. When global conditions were supportive and commodity prices were strong, capital inflows would strengthen the currency.
When risk aversion increased, or when commodity prices fell, the rand would weaken rapidly.
This behaviour made rand movements steeper and more sudden than those of many other currencies, especially those backed by larger and more diversified economies.
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