- On Friday, the rand saw its biggest one-day gain since president Cyril Ramaphosa clinched the ANC presidency in 2017.
- The rally was mostly due to dollar weakness, as the Fed indicated that it would keep US rates lower for longer.
- The rand rally could help secure fuel price cuts at SA pumps on Wednesday.
- For more articles, go to www.BusinessInsider.co.za.
The rand saw an almighty rally on Friday, rocketing to R16.56/$. As recently as three weeks ago, it was trading at R17.76.
It gained 2.8% in a single session – the biggest gain since December 18, 2017, the day president Cyril Ramaphosa won the ANC presidency, Business Day reported.
The rally is mostly due to dollar weakness. This week, the head of the Federal Reserve, Jerome Powell, announced a big shift in its policy to deal with inflation, which could mean delays in hiking interest rates. The Fed will tolerate higher levels of inflation, through “average inflation targeting” going forward, he said.
The Fed will aim for an average 2% inflation rate. Powell also indicated that interest rates will remain at or near zero, as the US economy struggled to recover from the coronavirus crisis.
Lower interest rates can be negative for a currency, because traders earn less when they hold the currency.
Even after large cuts this year, South Africa’s interest rate remains solid in a world where some lenders are paying others for the privilege of lending money to others. In many countries, interest rates are below zero.
And this week, a surprise spike in inflation in South Africa may have killed any chance of further cuts, bolstering the rand.
Consumer inflation spiked unexpectedly to 3.2% in July, Statistics South Africa announced on Wednesday. This is a massive 45% increase from 2.2% in June – and the biggest one-month rise since February 2016.
While some economists were expecting another one or two interest rate cuts this year, the nasty inflation surprise may dissuade the monetary policy committee of the SA Reserve Bank from lowering rates any further. There are already signs of hesitation: two of the five committee members voted against another cut in July. So far this year, rates have been cut by 300 basis points, to the lowest level in half a century.
According to The Economist’s Big Mac Index, the rand is the world’s most undervalued major currency – it’s now a whopping 67% cheaper than it theoretically should be against the dollar.
The rand closed at R22.13/pound and R19.73/euro on Friday night.
Impact on fuel prices
The latest rand strength could help to secure petrol price cuts next week. SA fuel prices are determined by the rand and oil prices, as the country imports the majority of its oil.
Currently, 95 petrol is on track for a cut of around 3c a litre, while 93 petrol could still be hiked by 6c. Diesel could be lowered by 19c.
SA’s fuel price is adjusted on the first Wednesday of every month.
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