The South African rand reached a 13-month high on Friday, driven by optimism surrounding the country’s economic prospects and expectations of imminent interest-rate cuts by the US Federal Reserve.
The rand strengthened by as much as 0.8%, hitting 17.5965 per dollar, its strongest level since July 2023. This increase brings the rand’s gain for the year to 4.3%, making it the best-performing currency among emerging markets after Malaysia’s ringgit. By 3:53 p.m. in Johannesburg, the rand traded 0.4% stronger at 17.6789 per dollar.
Investors are showing increased confidence in South African assets following the May 29 election, where the African National Congress formed a coalition with the main opposition Democratic Alliance and smaller parties. This political development has raised expectations of crucial economic reforms. Additionally, the easing of the country’s severe electricity outages, known as load-shedding, has brightened the economic outlook, according to Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Plc.
The prospect of US Federal Reserve policy easing, expected to start next month, has also prompted investors to seek higher-yielding assets like South African rand bonds. This has led to net inflows of 16.4 billion rand ($930 million) into South Africa’s debt market over the past five days, according to data from JSE Ltd. compiled by Bloomberg.
“The end to load-shedding has improved South Africa’s growth outlook, while disinflation is now in place—the cumulative impact of earlier tightening,” said Khan. “When we add to this the favorable impact of Fed easing expectations, everything falls into place for a sustained rand rally.”
The cessation of regular power outages could lead to upward revisions in economic growth forecasts and aid in combating inflation, as noted by South African Reserve Bank (SARB) Deputy Governor Rashad Cassim. The SARB currently forecasts the economy to grow by 1.1% in 2024 and 1.5% in 2025, with inflation expected to slow to below the 4.5% midpoint of its target range by the fourth quarter.
The central bank is anticipated to reduce its benchmark rate by approximately 123 basis points over the next year, according to forward-rate agreement pricing. The Fed, in contrast, is expected to cut rates by over 200 basis points during the same period, further widening the rate differential in favor of the rand.
With decreasing rand volatility, the South African currency has become more attractive in the carry trade, where investors borrow low-yielding currencies like the dollar to invest in higher-yielding assets. Government rand bonds have delivered a 5.4% return for dollar investors in August, compared to the 2.3% average return for emerging-market local-currency debt, according to Bloomberg indexes.
South Africa’s 10-year government bond yield dropped about 85 basis points this quarter, reaching an 18-month low on Thursday at approximately 10.55%. Despite this drop, the yield remains among the highest in developing nations, leaving room for further bond gains.
“The prospects of a lift in economic growth along with a still strong SARB monetary policy anchor may continue to engineer some rand overperformance,” Citigroup Inc. strategists, including Luis Costa, wrote in a note to clients. “The long end of the curve can continue to benefit from the global macro backdrop, while the improving fiscal dynamics will support some further tightening.”
