The rand stabilised by 0.4% to R18.34 against the US dollar yesterday as the market sentiment improved following last week’s volatility spiked by the US Federal Reserve’s (Fed) concern over the stickiness of inflation.
However, market analysts yesterday warned that there was volatility ahead for the rand depending on the outcome of the general elections.
More than 27 million eligible voters will tomorrow cast their votes in South Africa’s fiercely contested 2024 national and provincial elections, which the markets expect will result in the first-ever national coalition government as the ruling ANC’s support wanes.
This comes as the rand lost ground in the second half of last week after the release of the Federal Open Market Committee (FOMC) minutes showing the lack of significant progress on inflation returning to target.
The rand has strengthened from R19.40/$1 in April, back towards R18.00/$1 this month as markets factored out fears previously held of an ANC/EFF coalition, with election violence and instability not expected.
The rapid strengthening in the rand since April has increased its volatility, along with the recent pullback in the domestic currency on the release of the Fed minutes.
The rand weakness drives up petrol and diesel prices, as well as the cost of food and imported goods, or goods with imported components, and causes second-round effects from higher fuel prices, pushing up other goods and services costs.
Investec chief economist Annabel Bishop yesterday said the rand will be at risk from worse-than-expected voter support for the ANC, with the ANC expected to get around 45%, and forming a coalition with the centrist IFP party.
“The rand is expected to weaken should a higher-than-expected EFF outcome occur in the voting results, given the negative implications for the business sector and financial markets. The EFF is expected to get around 10% or less,” Bishop said.
“Markets expect the ANC to form a coalition government after the election, with a number of tiny parties, if needed, as well as the IFP. Should an ANC/EFF coalition occur, severe rand weakness would be expected to result.
“The biggest international driver of the rand will remain the beginning of the US interest rate cutting cycle, which has historically benefited EM currencies, as well as commodity currencies, and could drive the rand towards R17.00/$1, if not stronger.”
TreasuryONE currency strategist Andre Cilliers also noted that the rand had closed fairly flat against the dollar at R18.44 on Friday, but was weaker against the euro and pound.
“The local currency has managed to hold below the key 18.50 technical level for now, but with the election on Wednesday, we could still see some volatility and a possible break above,” Cilliers said.
Meanwhile, the JSE fell about 0.3% to close at 78 921, its lowest since mid-May, as traders turned more cautious ahead of local elections and an upcoming rate decision. The South African Reserve Bank (SARB) is expected to keep interest rates steady on Thursday, as headline inflation remains above the 4.5% target despite a surprising slowdown in April.
BUSINESS REPORT