Rand hits strongest level in months

News24

05-06-2025

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The rand was trading below R17.74/$ on Thursday afternoon, the local currency's best level since December last year. It has gained almost 3% over the past month.
The dollar has been under renewed pressure this week as disappointing labour data fuelled concerns about the US economy. Investors are also worried about how new tax cuts will worsen that country's debt crisis.
The rand has now strengthened by more than R2 against the dollar since April, when it traded above R19.90/$ amid fears of a DA exit from the Government of National Unity (GNU).
At the time, the rand was also hurt by a global sell-off of riskier assets amid the turmoil unleashed by US president Donald Trump's trade tariffs.
Since then, sentiment has improved somewhat, bolstering riskier assets like the rand, as the US has been amenable to reducing tariffs through negotiations, says Investec chief economist Annabel Bishop.
The survival of the GNU, and the well-received third iteration of the Budget, have underpinned rand strength in recent weeks.
On Wednesday, the 10-year government bond yield reached its strongest level in more than three years, falling below 10% after parliament's finance committee voted in favour of the National Treasury's fiscal framework. This paves the way for Budget 3.0 to be adopted by Parliament.
In addition, the SA Reserve Bank's campaign to lower the inflation target to 3% (from a band of 3% to 6%) has also bolstered the rand and bonds.
Lower inflation will be positive for both assets, but a stricter target would also require stricter monetary policy. High interest rates make rand assets attractive to foreign investors looking to earn yield.
Bishop said that the Reserve Bank's interest rate cut last week triggered 'mild' rand weakness, as the interest rate difference between SA and the US narrowed somewhat.
The market is expecting two rate cuts of 25 basis points each in the US this year, but these are only anticipated from the final quarter of 2025.
'However, further US interest rate cuts are built into market expectations for 2026 and 2027, allowing for further rand strength against the US dollar in the period,' said Bishop.
In the near term, however, rand strength may be limited. Markets tend to become more risk-averse as the Northern Hemisphere's summer approaches and many traders reduce their investments in riskier assets over the period while they are on holiday, Bishop added.
She says the rand's fair value (typically based on factors like trade, inflation differences and interest rates) was close to R16/$, but it is not expected to strengthen to that level until the fundamentals for economic growth improve in South Africa.
As revealed this week, the economy grew by only 0.1% in the first quarter this year, with sharp contractions in mining and manufacturing.
'Persistent weak economic growth in South Africa tends to be a disincentive for foreign investors, along with the rand's depreciation trend,' said Bishop. While there has been foreign interest in local bonds, global investors remain sellers of SA shares.
On Thursday, the rand gained slightly against the euro as the European Central Bank cut interest rates by a quarter point for the seventh time in a row, leaving the bank's rate at two percent. SA's repo rate is at 7.25%.
The rand was trading at R20.29/euro on Thursday afternoon. It started the year at around R19.50.