Rand could break through R15 to US dollar

The biggest driver behind the current rally is an interest rate cutting cycle in the United States, but with confidence on the home front also a factor.

For the past week, the rand has been at a 20-month high against the dollar. The question is how much further it will strengthen – and how long the rally will last.

Johann Els, group chief economist at Old Mutual, believes the rand could break through the R15-to-the-dollar ceiling in the next three to six months.

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On Thursday evening, the rand traded at R17.16 against the dollar – up 0.42% from the previous day.

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“The biggest driver of a firmer rand at present is an interest rate cutting cycle from the United States (US), which favours a stronger rand,” Els says, adding that rate cuts in the US will be deeper than the cuts in South Africa.

On Wednesday 18 September, the US Federal Reserve cut the fed funds rate by 50 basis points, while the South African Reserve Bank (Sarb) lowered interest rates by 25 basis points a day later.

Johan Gouws from PPS Wealth Advisory tells Moneyweb the difference between South Africa’s interest rate and that of the US is currently 3.17%, up from 2.92%.

“Depending on the timing, that difference may increase, which will give the rand further room to strengthen against the dollar,” says Gouws.

Els views the current rand strength as mainly because of the dollar, which is on the back foot. “A weaker dollar could mean that the rand, which is currently undervalued, recovers to its fundamental value,” Els adds.

Casey Sprake, investment analyst of Anchor, points out that the recently announced stimulus in China also bodes well for emerging markets. “China is an important export nation for South Africa, so we see any turnaround in economic activity there as positive. The rand has taken gains from that.”

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Els cautions that it is unlikely that the rand will stay at levels below R15 to the dollar, but for the time being, a stronger local currency means more fuel price reductions and inflation firmly under control.

Green shoots in SA

Gouws says besides further likely interest rate cuts in the US, contributing to a weaker dollar, there is also negative sentiment in America due to uncertainty around the upcoming presidential election and the country’s rising debt levels, which also weigh on the dollar.

However, positive sentiment about South Africa’s growth prospects also plays a role, although to a lesser extent.

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“I don’t think the current wave of optimism is misplaced. If we do a few things right, it could have a significant impact on confidence levels and eventually growth,” says Gouws.

According to Sprake, there is reassurance that the government of national unity (GNU) has “passed the test of durability”.

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“Although there was some noise with the signing of the Bela [Basic Education Laws Amendment] Bill, it was one of the GNU’s key tests and they passed it.”

On 13 September, President Cyril Ramaphosa signed the Bela Bill into law, but announced he would be suspending the implementation of two specific clauses in the bill for a three-month consultation period.

The DA is vehemently opposed to the two clauses relating to language policy and school admissions.

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3% growth is possible

Els believes the private sector’s involvement in addressing crises in the economy, such as electricity and, more recently, logistics, could see GDP increase from 1% to 2.5% over the shorter term.

Read: SA household wealth rises to highest levels in a year

“There are structural problems, which will hinder the 5% to 6% growth we experienced around 2004 to 2007 – the kind of growth rate we should be seeing. But the greater private sector involvement could help us get back to an average of 3% over the next three to seven years.”

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Nolan Wapenaar, co-chief investment officer and head of fixed income at Anchor, says in a company note that domestic factors such as an uptick in confidence thanks to the disappearance of load shedding “for now” will continue to favour a stronger rand.

“Perhaps our only worry is that China’s economy does not appear to be able to escape its current quagmire. From time to time, we may also see negative market sentiment toward the emerging market (EM) complex.

“That said, the path of least resistance for the rand is a slow grind stronger from current levels, albeit with bouts of volatility,” he notes.

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