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The rand broke below R17.20 for the first time since January 2023, bolstered by a new aggressive stimulus package in China and expectations of a continued, and growing, favourable gap between SA and US interest rates.
On Wednesday morning, the local currency strengthened to R17.1934/$. It has now gained more than 2% against the dollar over the past week.
This week, China announced a giant stimulus package, which included rate cuts along with new measures to boost mortgage demand and stock-market liquidity.
READ | Cuts, cash, credit: China’s massive bid to jumpstart its economy
This bolstered risk appetite, which helped emerging market currencies, including the rand. A strong Chinese economy will also boost demand for commodities, which will help South Africa’s mining exports.
The rand also continues to benefit from the large US interest rate cut (50 basis points) last week, and SA’s milder cut (25 basis points) in comparison, says Annabel Bishop, Investec chief economist.
The difference between SA’s repo rate (8.00%) and the US fed funds rate (around 4.83%) is now 3.17%, up from 2.92%, Bishop noted.
This means that assets denominated in rand now offer even higher interest rates compare to the dollar, which should attract foreign investors. The rand has also traditionally been a beneficiary of the carry trade, where investors borrow currencies with low interest rates – like the yen and dollar – to invest in higher-returning assets (like the rand).
“With SA cutting interest rates, at most, every two months, and the US every six weeks the underpin for rand strength remains, as the timing of interest rate decisions can aid in widening the interest rate differential between the two countries,” Bishop said.
The next US interest rate decision is on 7 November, and in SA on 21 November, the final one for the year. The Fed has another meeting in December.
In November, the SA Reserve Bank is only expected to cut by 25 basis points, while bets are growing that the Fed will announce a larger decrease. In addition, the Fed could also cut rates in December.
“The US is likely to cut its interest rates more quickly than South Africa in the current downwards rate cycles in the two countries, which will further strengthen the rand, particularly over 2025,” Bishop said.
The local currency also continued to be supported by positive investor sentiment towards SA following the elections, as well as the fact that South Africa has now been free of load shedding for close to 200 days, she added.
