Rand, N$ hit best level in months

The rand dipped below R18.35/$ – its strongest level since mid-January amid renewed optimism that US rates may be cut, along with subsiding election fears and commodity price strength.

By lunchtime, the local currency was trading at around R18.36, from R19.32 almost a month ago.

The rand is finding some stability around stronger levels as political risk of an ANC-EFF coalition nationally is seen to have faded, said Investec's chief economist Annabel Bishop.

Fears that the ANC would form an alliance with the EFF following the national election later this month have weighed on local markets since the start of the year.

But recent opinion polls have allayed these concerns, and since late April, non-residents have been net buyers of domestic bonds, Bloomberg reports. In April, foreign investors bought a net R3 billion worth of South African bonds – after being net sellers in February and March.

"Interest rate cuts seem to be still on for the US and European countries, giving the rand more reason to strengthen," added Casparus Treurnicht, portfolio manager at Gryphon Asset Management.

Greenback

The US dollar continued to consolidated against other major currencies yesterday as traders waited for US inflation data that could help determine whether the Federal Reserve could lower borrowing costs in 2024, and by how much.

Lower US rates are positive for the rand and other emerging market currencies, whose yields would look more attractive in comparison.

Recent softer-than-expected US labour market data and a Federal Reserve that ruled out further interest rate rises saw traders price in more easing from the Fed this year.

Markets are pricing in around an 80% chance of a rate cut by the Fed's September meeting, with about 40 basis points (bps) of cuts in total expected in 2024, LSEG data showed.

Comments by Fed officials last week varied, as some rate-setters debated whether interest rates were high enough. A jump in consumers' inflation expectations, revealed in a survey on Friday, could further complicate the conversation.

Inflation

With recent data indicating an economy that is slowing slightly from the robust growth seen in 2023, investors are looking to confirm how sticky inflation is.

The market will have a chance this week, with US inflation readings in the form of the producer price index (PPI) on Tuesday followed by the consumer price index (CPI) on Wednesday.

"Wednesday's US inflation data will determine if the rand makes new highs for the year," said Treurnicht. The rand briefly reached an intra-day high of below R18 in mid-January.

"CPI is such a big, polarising event for the whole market," said ING FX strategist Francesco Pesole.

"It's a possibility going into the event for the market to hold dollars given the recent tendency for inflation data to surprise to the upside," Pesole added.

"For the wheels to truly fall off of the US dollar, incoming data needs to point to disinflation, not just pockets of weakness here and there," said Matt Simpson, senior market analyst at City Index.

Commodity

Treurnicht said the rand also received support from stronger commodity prices.

"A few commodities have increased over the last few weeks, especially copper, providing the rand and other commodity-based currencies a boost.

"Platinum and coal also seemed to have bottomed, and they are especially important in South Africa," said Treurnicht.

Yesterday, the World Platinum Investment Council reported that it expected the platinum market to remain in a deficit this year amid a slowdown in the demand for electric vehicles.

From below US$880/ounce in February, platinum has moved back above US$1 000. - Fin24/Reuters