The rand isn’t acting like it’s supposed to

March 16, 2023 Michelle Hugo

South Africa’s rand usually strengthens when the dollar tracks weaker – but instead, it is slipping further.

Despite often positive outcomes due to a weakening dollar, the market was not kind to the rand in February, and the rand outlook is becoming more worrying, said Rashad Cassim, the deputy governor of the South African Reserve Bank (SARB).

The South African rand is closely tied to the US dollar due to the significant trade and investment ties between the two countries.

Various economic and political factors affect the rand’s exchange rate, including global commodity prices, inflation rates, and interest rate differentials between South Africa and the US. Traditionally when the dollar strengthens, the rand weakens and vice-versa.

“In a world where the dollar is weakening, the rand is likely to benefit along with other currencies,” the deputy governor said.

Cassim said that the US economy still appears to be running hot, and the market has rapidly priced in an extra half a percentage point of US Federal Reserve interest rate hikes.

“This has helped weaken the rand from around R17 per dollar in January 2023 to over R18 to the dollar recently,” Cassim said.

Local interest rates are also well below those in some peer economies, adding to a weaker currency, he said. For example, Brazil’s policy rate is at 13.75%, Mexico’s is at 11%, and Hungary’s is at 13%.

South Africa, on the other hand, has a repurchase rate of 7.25% and a prime lending rate of 10.75%.

Investec’s chief economist Annabel Bishop said that comparatively low-interest rates in South Africa, paired with high inflation, have reduced real returns, making investors look elsewhere.

The risk premium associated with the rand has been reduced due to the slower rate hikes compared to the US.

Cassim said that domestic factors have also not helped the rand’s situation with declining growth expectations stemming from continual load shedding. He said the local news flow had been mostly rand-negative.

South Africa’s currency ended 1.6% lower against the US dollar on Wednesday, shrugging off a smaller-than-expected drop in local retail sales earlier this year.

Stats SA showed retail sales fell 0.8% year on year in January after falling by a revised 0.5% in December.

On Wednesday (15 March), the rand tanked after the US banking crisis spread to Europe and wreaked havoc on global markets.

Reuters said the US’ blue-chip Top 40 and its broader all-share indexes fell around 3% to the lowest they have been this year.

The fall follows a major global investment banking company Credit Suisse announcing that it was unable to increase its stake – citing regulatory issues surrounding the size of its holding.

Recent data has pointed to ongoing weakness in Africa’s most industrialised economy after a bigger-than-forecast fall in the fourth-quarter gross domestic product, said Reuters.

According to Cassim, the central bank is anticipating growth rates of 0.3%, 0.7%, and 1.0% for the next three years, which is a ‘very disappointing outlook’.

He added that these growth rates are “catastrophically low”, and coupled with a population growth rate of about 1.2% per year, it implies that living standards will continue to deteriorate as they have since 2014.

Domestic challenges have seemingly taken control of the rand, with severe power constraints and political instability adding to the volatility.

According to the latest Stats SA data, the country’s economy has been hit considerably hard by load shedding, resulting in a seasonally adjusted contraction of 1.3% in Q4 2022.

The graph below shows the ZAR/US Dollar trajectory over the past month: