Rand's recovery: What foreign inflows mean for the SARB's decision

The South African rand has staged a strong recovery against the US dollar, trading at R17.39 on Wednesday after nearly breaching R20.00 in April.

The local currency’s resilience is being fuelled by foreign investment inflows rather than dollar weakness, raising expectations it could test R17.00 before the end of the year.

Investec chief economist Annabel Bishop said the rand gained ground from R17.63 at the start of last week to R17.34 by Friday, driven by “substantial foreign inflows into South Africa, with R41.3 billion in net purchases as US rate cut expectations increased”.

Bishop pointed out that “the US dollar saw a period of relative stability last week, but the rand [gained] significant strength from portfolio inflows as opposed to US dollar weakness, with the latter having been a key driver this year of rand appreciation against the greenback.”

Anchor Capital head of fixed income Nolan Wapenaar said the currency’s performance was in line with expectations.

“Much in line with Anchor’s expectations, the South African rand has been grinding stronger. We expect that the increasing likelihood of interest rate cuts in the US will support this trend, and it is quite plausible that the rand will test the R17.00 to a US dollar level before the year’s end,” Wapenaar said.

Wapenaar added that the firmer rand would support the South African Reserve Bank (SARB) in keeping a lid on price pressures.

“SARB Governor [Lesetja] Kganyago will be rather happy to see this development as it should keep inflation in check domestically, possibly opening the door for a lower inflation target and for possible domestic interest rate cuts down the line,” he said.

Wapenaar noted that lower oil prices could add to the positive momentum.

“Coupled with the OPEC quota increases, we expect that the price of transport and fuel has some space to come down, which should give everyone a little cheer heading into the festive season,” Wapenaar said.

For now, however, the market remains cautious.

TreasuryONE currency strategist Andre Cilliers said, “the South African rand stayed relatively yesterday, as investors await local inflation data and the South African Reserve Bank’s (SARB’s) interest rate decision later this week”.

All eyes will be on the SARB’s decision on Thursday for guidance on the future path of interest rates, with the rand’s recent strength expected to weigh heavily on the central bank’s outlook for inflation and monetary policy.

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