Rand hits key R18 to dollar mark but struggles to hold gains

A man holds South African Rand notes on a counter. Picture: Karen Sandison/ANA

A man holds South African Rand notes on a counter. Picture: Karen Sandison/ANA

Published Jul 18, 2023

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The rand strengthened to the R18-mark against the US dollar early yesterday before sliding back to R18.13 against the dollar ahead of inflation data for June and key monetary policy meetings.

This comes after the rand briefly broke through R18/$ on Thursday, recording its strongest gain in 3 months at R17.92/$1 - the highest since April 20- before settling on R18.08/$1 on Friday on the back of a weak dollar.

Softer US inflation data last week raised hopes of an end to the Federal Reserve’s (Fed) rate hiking cycle but some profit-taking saw the rand soften on Friday.

Some volatility in the rand is expected this week as consumer inflation data will be released as well as the SA Reserve Bank’s (SARB) interest rate decision on Thursday.

Economists have tipped the SARB to hike rates for at least the last time in this cycle with a 25 basis point increase as inflation is still around the upper limit of the 3-6% target band.

However, others were expecting the bank to leave interest rates on hold at a 14-year high of 8.25%, and there were none who forecast a rate cut as yet.

Investec chief economist Annabel Bishop yesterday said the dollar's weakness recently had been key in allowing the rand to pierce the R18.00/$1 mark.

Bishop said the Fed was likely to retain restrictive monetary policy this year, and not move into a cutting cycle in the second half of 2023, but the risk for one more interest rate hike from the US persisted, either in July or September, which was also hanging over the rand.

“The world’s largest economy sees its next interest rate meeting close to the end of the month, around a week after SA’s Monetary Policy Committee meeting. A flat US interest rate outcome would be supportive of the rand, underpinning further strengthening,” Bishop said.

“The rand is trading at R20.27/EUR and R23.60/GBP, having made notable gains against the key crosses, with potentially more strength to come, although weakness is likely to be marked on a disappointingly Federal Open Market Committee outcome.”

Property companies have noted that homeowners were currently struggling to keep up with the cost of home ownership and that the high rates have exacerbated the weak economy.

Seeff Property Group chairman Samuel Seef yesterday said the SARB should keep the repurchase unchanged.

Seef said property sales volumes were down as the market reflected the interest rate hikes.

“The interest rate is too high. It is stymieing economic growth and driving unemployment and higher debt levels, and it is now enough,” Seeff said.

“The SARB should now start looking at bringing the rate down.”

Meanwhile, Old Mutual Wealth investment strategist Izak Odendaal said interest rates never went up as much, and therefore the decline, when it came, was unlikely to be substantial.

In fact, Odendaal said the recent cycle was unusual in that local short-term interest rates, long among the highest in the peer group, lagged.

He said currencies were very sensitive to expected changes in short-term rates, and the nearing end to the Fed’s hiking cycle has seen the dollar pull back decisively against a range of other currencies last week.

“This included the rand, which rallied to R18.10, the best level since April. The dollar could get another leg down if Japan finally becomes the last country on earth to abandon negative interest rates,” Odendaal said.

“But we shouldn’t get too excited about dollar weakness given that the US still has several structural and cyclical advantages over other developed countries.”

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