Edward-John Bottomley , Business Insider SA / June 2020
The rand continued its rally against the dollar on Wednesday, as the currency benefits from emerging market optimism, and a weakening dollar.
A dollar will now cost you less than R17, as the currency continued strengthening after losing significant value over the last few months when investors fled emerging markets amid the Covid-19 crisis. Last month it reached a record low of R19.26/$ amid a perfect storm of global economic paralysis and concern about South Africa’s fiscal position.
For consumers a strengthening rand means less potential inflation. The rally will also help counterbalance the oil recovery.
The oil price briefly touched $40 for a barrel of Brent crude for the first time since March. If it continues, the rise in oil prices will hurt consumers at the pump, where the petrol price just increased by R1.18 per litre. A stronger rand will slow down that increase.
For consumers a strengthening rand means less potential inflation. The rally will also help counterbalance the oil recovery.
The oil price briefly touched $40 for a barrel of Brent crude for the first time since March. If it continues, the rise in oil prices will hurt consumers at the pump, where the petrol price just increased by R1.18 per litre. A stronger rand will slow down that increase.
For consumers “the cost of petrol should still go up,” says Nolan Wapenaar, co-chief investment officer at Anchor Capital. “But not as much as if the rand was at R19 to the dollar.”
Wapenaar says he was “absolutely surprised” at the speed of the rally. He expects the rand to fall below R16 to the dollar by September or October. “This has been a lot quicker than I expected.”
Apart from the emerging market rally, the rand has benefited from strong dollar that is now busy weakening, he says.
Signs of recovery in Europe, such as the announcement of a multi-billion euro stimulus package in Germany, has meant a move away from the dollar. The dollar has also not been helped by the ongoing protests which have rocked cities across the USA.
Signs of recovery in Europe, such as the announcement of a multi-billion euro stimulus package in Germany, has meant a move away from the dollar.
There’s global optimism from investors as the lockdowns that have shut down economic activity begin to lift, and economies begin to restart, says Azar Jammine, chief economist at Econometrix.
“Investors also see the rand as undervalued, and they’re buying into our bonds because of high yields.”
Both Jammine and Wappenaar caution that it’s still a long road ahead for the rand.
“It’s important not to exaggerate the strength of the rand,” says Jammine. “It’s now making its way back to more reasonable levels.”
Both Jammine and Wappenaar caution that it’s still a long road ahead for the rand.
“You claw your way out of trouble, you don’t bounce back out of trouble,” says Wapenaar.
Source: Business Insider SA