Johannesburg - A weakening dollar and an upswing in commodity prices yesterday boosted the rand, as the currency rallied to its best level against the dollar in four months.
By 5pm the rand was at R14.2728 to the dollar, 20.65x firmer than at the same time on Monday. Earlier in the day, it broke through R14.40 barrier to the dollar‚ the best level since early December. In what amounts to a reversal of the trend late last year, the rand benefited from capital outflows from the US to emerging markets.
Read: Door open for rand rally
Econometrix chief economist Azar Jammine said yesterday that there were several reasons why the emerging markets were back in favour. Jammine said it had become clear that the US Federal Reserve Bank would not raise interest rates as aggressively as previously anticipated. An increase in US interest rates triggers a flood of capital to the US as investors seek higher returns.
“(The rand rally) does not mean that our political and economic situation has improved. It is a global phenomenon. The rand was driven down so sharply. Now we see an appropriate recovery,” he said.
Jammine said the recent interest rate hikes had made South Africa’s bonds attractive. Foreign investors bought a net R30 billion worth of South African debt this year, compared with R10bn last year.
Rand Merchant Bank currency strategist John Cairns said yesterday that a combination of global developments were responsible for the change in sentiment towards the rand.
Cairns cited a weakening dollar, rising commodity prices and local political developments. “Portfolio capital inflows have been very strong,” he said. The rand could strengthen further if the dollar continued to weaken.
Efficient Group economist Francois Stofberg also partly credited the Reserve Bank’s consistent and effective monetary policy for the strengthening currency.
“Most recently, however, the drop in oil prices is expected to aid net importers of oil, most of which are developing, commodity-driven economies,” Stofberg said. He said the rand could strengthen to R14 to the dollar by the end of the year.
“However, inflation will be tougher to abate after a two-season drought and almost four months of higher-priced imports. “It is also unlikely that our current account deficit will improve much, keeping us capital-dependent, (namely) dollar-dependent, which constrains the rand and, thereby, inflation,” Stofberg said.
Undervalued
He said the rand was likely to continue on a steady, strengthening trajectory. The currency had been severely undervalued and was returning to “normal” levels.
A stronger rand is good news for motorists, because a weaker currency wipes out the benefits of the lower oil prices. Failure by the world’s biggest oil suppliers to reach an agreement on production in order to drive up prices had earlier this week raised fears of a fall in oil prices.
At 6pm yesterday, the spot price of Brent crude oil was up 3.09 percent at $44.43 (R648.10) per barrel.
“We have seen that, as a result of the stalemate, that the international price for Brent crude oil has dropped from levels above $46 a barrel to levels closer to $42 a barrel.
If everything else is kept constant, (namely) the rand/dollar exchange rate, the petrol price locally should fall,” Stofberg said.
He said the crude oil price was likely to increase gradually to $50 per barrel.
BUSINESS REPORT