The Rand exchange rate is good news in a time when bad news seems to be the order of the day, with the rate continuing to strengthen over the past few months.
Although the strength of the local unit has analysts guessing when this bullish run will actually end and if so, at what level, some analysts have even revised their forecast for 2021 significantly lower.
The Rand fell to a low of R19.26/$ on 6 April 2020 during the first wave of Covid-19 infections, but then muscled its way to R13.43/$ on 6 June 2021. The Rand’s firmness prompted NKC African Economics, a provider of independent economic and political research on Africa, to revise its forecast for this year significantly lower.
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Why is the Rand doing so well?
NKC says a combination of international and local factors has been the driving force behind the Rand’s recovery:
- Firstly, the Rand was supported by dollar weakness over the past few quarters. The dollar was under pressure despite the US Fed’s forward guidance of tapering expected to start in early-2022 and a rate lift-off in early-2023, as some data releases have pointed towards slower economic activity. The analysts at NKC say this could result in less accommodative monetary policy happening later than expected.
- Secondly, inflation differentials between the US and South Africa have narrowed considerably, swinging in favour of the Rand. The latest US inflation print in April was 4.2%, only slightly lower than South Africa’s inflation rate of 4.4% also in April.
- Thirdly, South African bonds remained attractive for investors compared to other emerging markets, resulting in favourable yields. The low and stable interest rate environment combined with a surprising increase in economic activity, made local bonds more attractive.
- Lastly, the elevated commodity price environment helped to drive the local exchange unit higher. The level of commodity prices has created a robust export environment for commodity-rich countries and therefore the current account registered a record surplus in the third quarter of last year, remaining strong during the fourth quarter. NKC expects another healthy surplus for the first quarter of this year when the data is released on Thursday.
NKC says it expects that the Rand will remain firm during the second quarter, as these trends are expected to persist for the rest of the year.
Despite a weak pass-through, the stronger Rand should also lower imported inflation as consumer price pressures start to intensify. However, should the US Fed commence tapering in the first half of 2022 and commodity prices start to decline, NKC expects the Rand to start sliding again.