The rand has clocked up gains of more than 30% against the dollar since the end of 2015, and hit a 20-month peak of R12.43 on 24 March this year. It has remained resilient since then despite a shock Cabinet reshuffle, credit rating downgrades, news that the economy has sunk into a recession, and continued political and policy uncertainty. An unexpected interest rate cut in July – the first in five years – also did nothing to dent its strength. The question is, will the currency continue to stand its ground as political risks mount ahead of the ANC leadership conference at the end of this year?
Strong
The general consensus is yes, with most analysts predicting the rand will end the year at current levels close to R13 to the dollar even if the Reserve Bank cuts interest rates again, as expected. For many South Africans, the trend is puzzling.
However, the currency has been supported by two important trends that show no signs of shifting soon. One is the global “risk on” environment, which means that investors are confident enough to pump money into emerging-market assets for the better yields which they offer. The other is South Africa’s widening trade surplus, which has narrowed the deficit on its current account – the broadest measure of trade in goods and services. This is key as the shortfall must be covered by inflows of foreign capital into domestic bonds and equities – also known as “hot money” – which could suddenly reverse in response to a shift in sentiment towards the country, or emerging markets generally.
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