Bumpy road ahead for the rand

The rand is currently above R19/$, and South Africans should expect volatility over the next two years.

Despite a slight improvement in the rand’s performance against the greenback in June and July – dropping to a low R17.27/$, the local currency is currently sitting at R19.14/$.

Harry Scherzer, the CEO at Future Forex, said that the rand has been severely affected by the dollar’s strength.

The dollar itself has remained strong, with yields on Treasury bonds increasing from 4.22% to 4.26% on the dollar.

However, the larger impact is that alternative currencies and economies, such as China, are struggling in their post-Covid recovery.

Therefore, some of China’s biggest property firms are nearing bankruptcy, the nation’s youth unemployment has reached an all-time high of 20%, and political concerns are scaring investors away.

“This is leading to emerging markets having less traction and investors putting their funds back in the dollar. So that is what has caused the strong dollar,” Scherzer said.

“But along with this, we’re not helping ourselves within our borders, with Eskom having implemented stage 6 load shedding following plant breakdowns.”

Although Eskom is not helping the rand, he said that the growing strength of the dollar is the main reason for the rand’s weakness.

Outlook

Despite saying that predicting short-term movements of the rand can be challenging due to its volatility, Scherzer said that the rand will likely continue experiencing weakness against the dollar.

“This is due to the global market adopting a “risk-off” stance influenced by concerns like inflation,” he said

“Furthermore, the market’s apprehensions are intensified by ongoing domestic issues in South Africa, such as rolling blackouts and ongoing ties with Russia and the ‘Global South’.”

He added that this “risk-off” stance approach will likely boost the dollar and weaken emerging markets, such as the rand. These global shifts are more likely to influence the rand than domestic issues, such as load shedding.

According to current expectations, China’s Consumer Price Index (CPI) might remain negative or near zero, considering the high baseline from the previous year, making it difficult for China to adjust their monetary policy by the end of 2023.

In addition, for 2024, Scherzer said that political uncertainties have generally increased volatility in foreign exchange markets,

“Given this, it’s reasonable to anticipate heightened volatility in the ZAR/USD exchange rate approaching the 2024 elections (in both countries),” he said.

“As the saying goes, in such times, the only certainty is increased uncertainty and volatility.”

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