The rand surged to its highest in one month yesterday, while the JSE was at a two-week high, bolstered by a weakening US dollar and heightened expectations of a forthcoming US Federal Reserve (Fed) rate cut.
The domestic currency strengthened by 0.4% and dipped below the R18-mark to the dollar just after lunchtime, its strongest level since mid-July, though it lost some gains in the afternoon trade and moved back above the R18/$1 level.
The JSE All-Share Index also surged by 1.4% to 82 533 points, a touch below the highest level of 82 765 points reached on July 31, as stocks were driven by the surge in the Standard Bank share price, Sasol, Truworths, and Absa.
Economists are anticipating a 25 basis point interest rate cut in South Africa next month, with another potential cut in November as the inflation rate eased to a six-months low of 5.1% in June, though it remains above the SA Reserve Bank’s target of 4.5%
The monetary policy committee left its benchmark interest rate unchanged at a 14-year high of 8.25% for a seventh consecutive meeting in July as its Monetary Policy Committee is worried about the inflation outlook.
Investec chief economist, Annabel Bishop, yesterday said the rand has seen recovery as markets look forward to successive Fed cuts this year and in the first half of 2025.
Bishop said the Fed was expected to cut by at least 25 basis points at its next three Federal Open Market Committee (FOMC) meetings in September, November, and December, and then by another 25 basis points at the four meetings in the first half of 2025.
“This will take the drop in the Fed funds rate to 175 basis points by the end of the first half of 2025, with another 25bp cut then expected in July, 2025 and a further drop of 25 basis points by October, 2025, completing a 2.0% cut,” Bishop said.
“In addition the rand strengthened when markets calmed after last week’s market turmoil. Lastly, the domestic currency is fundamentally stronger after the country’s democratic national elections and formation of a new government,” she said.
Meanwhile, investors are also optimistic about South Africa’s economic prospects under the new coalition government.
Sentiment in the business sector in South Africa ramped up to a four-month high in July following the formation of the Government of National Unity (GNU), and mainly driven by the increased new vehicle sales and a stronger rand exchange rate.
Deputy Finance Minister Ashor Sarupen has also said the government was committed to rapid reforms aimed at boosting growth to at least 3.5% in the medium term and reducing unemployment.
Unemployment has risen to its highest in two years to 8.4 million, with 33.5% of the working-age group population remaining jobless – up from 32.9% in the first quarter.
But prospects for the rand could be dimmed if the economy continues to underperform and create jobs and attract investment that would boost activity.
André Cilliers, currency strategist at TreasuryONE, said the rand will be data dependant in the days ahead.
“The rand is trading at its best levels in a month. This is due to expected interest rate cuts in the US,” Cilliers said.
“We do think the rand will struggle to break below the R18-level, so imports can use the levels to cover themselves a bit in the short term. We still expect the rand to take its cues from international data and keep in the R18 to R18.50 (to the dollar) range in the short term,” he said.
BUSINESS REPORT