The South African rand (ZAR) bounced back from a weak start to 2024, gaining against the US dollar (USD) and other major currencies on Thursday. The ZAR was supported by positive global market sentiment, as investors shrugged off concerns about the Omicron variant and the US Federal Reserve’s policy tightening.
The rand was trading at 15.32 per USD at 12:00 GMT, up 0.8% from its opening level of 15.45. The ZAR also appreciated against the euro (EUR), the British pound (GBP), and the Japanese yen (JPY), as well as other emerging market currencies such as the Turkish lira (TRY) and the Brazilian real (BRL).
The ZAR’s recovery was driven by a renewed appetite for riskier assets, as global stock markets rallied and bond yields eased. Investors were encouraged by the signs of resilience in the global economy despite the challenges posed by the Omicron variant and the Fed’s plans to raise interest rates and reduce its bond purchases.
The rand also benefited from the strength in commodity prices, especially gold and platinum, which are key exports for South Africa. Gold prices rose to a six-week high of $1,837 per ounce, while platinum prices climbed to a two-month high of $1,029 per ounce. The higher commodity prices boosted South Africa’s terms of trade and its current account balance, which recorded a surplus of 6.5% of GDP in the third quarter of 2023.
ZAR faces headwinds from domestic factors and Fed policy
However, the rand’s gains were limited by some domestic factors that weighed on its outlook. South Africa’s economy contracted by 1.5% in the third quarter of 2023, as the country faced power outages, social unrest, and Covid-19 restrictions. The economic recovery remains fragile and uneven, with high unemployment, inflation, and debt levels.
The rand also faced pressure from the expectations of higher US interest rates and a stronger dollar. The Fed announced on Wednesday that it would accelerate its tapering of bond purchases and signaled that it could raise interest rates three times in 2024, starting from March. The Fed’s hawkish stance could reduce the attractiveness of emerging market assets and cause capital outflows from countries like South Africa.
The ZAR/USD exchange rate is likely to remain volatile in the coming weeks, as the market reacts to the developments in the global and local pandemic situation, the Fed’s policy moves, and the South African Reserve Bank’s (SARB) monetary stance. The SARB kept its benchmark interest rate unchanged at 3.5% in November, but indicated that it could hike rates in 2024 to contain inflation.
