South Africa’s rand tends to strengthen when the dollar weakens, but instead it sinks further.
Despite often positive results due to a weakening dollar, the market was not favorable to the rand in February and the outlook for the rand 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.
Several economic and political factors affect the exchange rate of the rand, 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 the US economy still appears to be hot and the market has quickly priced in an extra half percentage point for the US Federal Reserve’s interest rate hikes.
“This has helped weaken the rand from about R17 per dollar in January 2023 to more than R18 per dollar recently,” said Cassim.
Local interest rates are also well below those in some peer economies, contributing to a weaker currency, he said. Brazil’s policy rate, for example, is 13.75%, Mexico’s 11% and Hungary’s 13%.
South Africa, on the other hand, has a repurchase rate of 7.25% and a prime lending rate of 10.75%.
Annabel Bishop, Investec’s chief economist, said relatively low interest rates in South Africa, combined with high inflation, have lowered real returns, forcing investors to look elsewhere.
The risk premium associated with the rand has been reduced as a result of slower interest rate hikes compared to the US.
Cassim said domestic factors have also not helped the rand’s situation with declining growth expectations due to continued tax cuts. He said the local news stream was largely fringe negative.
The South African currency finished 1.6% lower against the US dollar on Wednesday, offsetting a smaller-than-expected decline in local retail sales earlier this year.
Stats SA showed retail sales were down 0.8% year on year in January after falling a revised 0.5% in December.
On Wednesday (March 15), the rand plummeted as the US banking crisis spread to Europe and wreaked havoc on global markets.
Reuters said the US blue-chip Top 40 and broader all-share indices are down about 3% to the lowest they were this year.
The drop follows a major global investment bank, Credit Suisse, announcing it was unable to increase its stake – citing regulatory concerns around the size of its stake.
Recent data points to continued weakness in Africa’s most industrialized economy after a larger-than-expected drop in gross domestic product in the fourth quarter, Reuters said.
According to Cassim, the central bank expects growth rates of 0.3%, 0.7% and 1.0% for the next three years, which are “very disappointing prospects”.
He added that these growth rates are “catastrophically low”, and when combined with population growth 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 over the edge, with severe power constraints and political instability adding to the volatility.
According to the latest data from Stats SA, the country’s economy has been hit quite hard by tax increases, resulting in a seasonally adjusted contraction of 1.3% in the fourth quarter of 2022.
The chart below shows the trajectory of the ZAR/US Dollar over the past month:
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