For the past week, the S.A rand has been at a 20-month high against the dollar. The question is how much further it will strengthen – and how long the rally will last.
Johann Els, group chief economist at Old Mutual, believes the rand could break through the R15-to-the-dollar ceiling in the next three to six months.
On Thursday evening, the rand traded at R17,16 against the dollar – up 0,42 percent from the previous day.
“The biggest driver of a firmer rand at present is an interest rate cutting cycle from the United States (US), which favors a stronger S.A rand,” Els says, adding that rate cuts in the US will be deeper than the cuts in South Africa.
On Wednesday 18 September, the US Federal Reserve cut the fed funds rate by 50 basis points, while the South African Reserve Bank (Sarb) lowered interest rates by 25 basis points a day later.
Johan Gouws from PPS Wealth Advisory tells Moneyweb the difference between South Africa’s interest rate and that of the US is currently 3,17 percent, up from 2,92 percent.
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“Depending on the timing, that difference may increase, which will give the rand further room to strengthen against the dollar,” says Gouws.
Els views the current rand strength as mainly because of the dollar, which is on the back foot. “A weaker dollar could mean that the rand, which is currently undervalued, recovers to its fundamental value,” Els adds.
Casey Sprake, investment analyst of Anchor, points out that the recently announced stimulus in China also bodes well for emerging markets.
“China is an important export nation for South Africa, so we see any turnaround in economic activity there as positive. The S.A rand has taken gains from that.”
Els cautions that it is unlikely that the rand will stay at levels below R15 to the dollar, but for the time being, a stronger local currency means more fuel price reductions and inflation firmly under control.
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