The rand ended the week on a positive footing in spite of the dollar surging to a seven-week high after the US economy posted more than expected job number for January.
The domestic currency on Friday rose 0.6% to R18.89 against the US dollar after starting the week at R18.80 to the greenback on Monday, and strengthening to a two-week high of R18.58/$1 on Thursday.
This was in spite of the US dollar rising the highest in seven weeks as traders scaled back expectations of rate cuts by the US Federal Reserve (Fed) prompted by a stronger-than-expected US jobs report for January.
The US economy added 353 000 jobs last month, following an upwardly revised 333 000 rise in December, far exceeding the market expectations of a 180 000 advance and the biggest rise in employment in a year.
However, the domestic currency faces a mix of challenges in the short term amid uncertainty about the timing of policy loosening by major central banks, particularly the Fed, and South Africa’s Budget on the back of competing national priorities in an election year.
Fed chairperson Jerome Powell signalled that rate cuts were possible this year, but pushed back on expectations of cuts as soon as March.
The Fed last week said there were no plans yet to cut rates until inflation had been brought under control and was on its way toward the Fed’s 2% inflation goal as it was still running above the central bank’s target.
Nedbank economist Isaac Matshego on Friday said that the rand was firmer this week after the Fed announcement boosted emerging market assets.
Matshego noted that the rand had dipped, albeit slightly, earlier in the week on negative sentiment after the Transparency International annual survey showed perceptions of corruption in South Africa had risen to their highest level on record.
“The rand gained further ground this week, firming late in the week on the back of risk-on trade after the Fed almost confirmed that the tightening cycle had ended, although it stressed that a March rate cut was not the base case,” Matshego said.
“The US dollar also weakened relative to its peer economies as investors continued to bet that the Fed is close to cutting interest rates.”
However, analysts also warned that the rand was in for yet another volatile year as global interest rates, economic indicators, political stability, and market speculation were the backbone of the currency realm.
Citadel Global director Bianca Botes said the rand was going to grapple with multiple risks such as the impending National Budget this month with its potential populist ideals, raising concerns around additional fiscal deficits in the market.
Botes also said the upcoming election promised a display of populist policies and suppressed commodity prices cast a shadow over the rand's prospects while geopolitical associations in the form of Iran, Russia, and China also had significant consequences.
“In the short term, the rand encounters a mix of challenges – an election year budget which is poised to adopt some populist ideals in February, upcoming South African elections with promises of populist policies to win over the hearts of the most desperate in our societies,” Botes said.
“Looking at the medium term, the rand's fate intertwines with the global economy, commodity prices, the Fed interest rate trajectory, and a plethora of elections. It's not an orchestrated hit but a pragmatic sequence of events, occasionally marked by unforeseen developments.
“Venturing into the long term, the rand faces the intricate dance of commodity exports, the local fiscal balance, and the perpetual struggle between growth and unemployment.”
BUSINESS REPORT