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Why the rand is getting stronger (and how much stronger it can get)

In short:

  1. The rand has strengthened from R11.33/US$ at the start of October to R10.84 on Wednesday, 29 October.

  2. It could break through the R10.70 barrier in the short-term.

  3. Fears that the US Fed will hike interest rates have subsided due to unexpectedly poor data, resulting in an increasing appetite for “risky” emerging market assets such as ours.

  4. The South African economy remains fundamentally weak and the rand will probably remain frail over the medium-term.

  5. Click here to read "Why petrol will be (much) cheaper by Christmas (if the rand holds)"

The rand is looking positively perky when compared to the last few months, despite a tepid economy and our persistently large budget deficit (i.e. government spending more than it earns) and current account deficit (i.e. the country importing more than it exports).

Fears of US interest rate hikes are waning

“The strength we’re seeing now has everything to do with fading fears of US interest rate hikes,” explains Currency Strategist at Barclays Africa Michael Keenan. “Over the last few months US data pointed to a strengthening economy which would’ve inevitably led to rising interest rates in 2015. That, in turn, would’ve caused risk aversion, falling commodity prices and a waning appetite for emerging markets.”

Shocking data out of Europe and disappointing figures from the US have intensified global growth concerns and, as a result, caused the fear of interest rate hikes to wane.

“Risky assets are doing well and the rand is benefiting as a result,” says Keenan. “Coupled with lower oil prices; it’s all contributing to a better mood in the market and a stronger rand.”

How strong can the rand get?

The rand can strengthen even more in the short-term, as long as fears of US rate hikes remain muted. “I wouldn’t get too excited though,” says Keenan. “There are a lot of risks still facing the currency over the medium-term.”

The tone of the US Federal Reserve’s October meeting tonight (Wednesday, 29 October) will determine whether or not the appetite for “risky” assets will continue. If it does the rand will get even stronger.

“It could go up to around R10.70 or even a bit lower,” predicts Keenan. “Over the medium term, however, the rand will probably still tend to weaken. South Africa is still not a great investor destination. It’s merely benefitting from a bit of dollar weakness.”

Listen to the Soundcloud clip for more detail.

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