The rand strengthened to less than R18 a the dollar on Thursday, stretching its gains to a seventh straight day — the longest winning streak since June last year, as expectations of a US interest rate cut in September boosted sentiment towards riskier assets.
The local currency, widely considered a barometer of investor sentiment towards emerging markets because of its liquidity, touched an intraday best of R17.9688/$, the strongest in a month. It was also the best performer among its emerging-market peers, followed by the Russian rouble.
Investors are interpreting the latest US inflation data, which was in line with forecasts, as a further indication that previously persistent inflation is indeed softening and the Fed’s efforts to tame prices through monetary policy adjustments are yielding the desired results.
As inflation concerns recede, investors are becoming increasingly optimistic about the economy, potentially paving the way for interest rate cuts and a boost to consumer spending.
Data published by Stats SA on Wednesday show SA’s retail sector performance beat expectations in June, suggesting consumers are more optimistic about their finances, a promising sign for the overall economy.
James Turp, head of fixed-income investment strategy at Sanlam, said the local retail numbers provided support to their improved GDP outlook, which would offer further support for the rand.
“Our official house view is that the rand is on the path of appreciation in line with our purchasing power parity (PPP) model, which forecasts the rand to end the year at about R17.80/$, and end 2025 at about R16.90/$.”
Sanlam’s long-term view on the rand is based on stable commodity prices, and improvement in SA’s terms of trade and higher economic growth.
Turp said the prospects and outlook for US rate cuts would bolster currencies with high yields such as the rand.
The R18/$ mark is seen as an important psychological level, with traders watching closely if the currency will hold onto its gains below this level.
IG senior market analyst Shaun Murison said the move below R18/$ suggest R17.85/$ and R17.50/$ are feasible targets.
However, Turp cautioned about risks that are always brewing that could affect further gains in the rand. These include geopolitical risk, particularly in the Middle East, and domestic challenges.
Andre Cilliers, currency strategist at TreasuryONE, was similarly cautious on the rand’s outlook.
“While the [US inflation] data showed some softening in prices, the stickier aspects of inflation could keep the Fed cautious. Its future actions will likely be data-dependent, with a cautious approach to rate cuts.
“As such, the rand will continue to be data-dependent and we think it will struggle to break sustainably below R18/$,” Cilliers said. “We still expect the rand to take its cue from international data and keep in the R18-R18.50/$ range in the short term.”
At 8pm the rand was 0.45% firmer at R17.9938/$.
Markets are pricing in a 25 basis point rate cut by the Fed in September, while 50 basis points was expected last week on fears the US may be heading for recession.
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