Rand races to pre-pandemic levels due to weaker dollar
The rand extended its rally on Thursday, breaking below R14.30/$ for the first time in 14 months, which will likely help keep consumer inflation in check.
The rand, a highly tradable currency in emerging markets, raced to session highs of R14.28/$, its best level since January 2020, up 0.71% on the day.
The local currency was also at its best against the pound in four months as it gained 0.50% to R19.72/£. Against the euro, the rand was up 0.67% to €17.13.
Just more than a year ago, the rand, which is is regarded as a proxy of sentiment towards emerging markets, was in the eye of the storm, plunging to record lows of R19/$ when the Covid-19 pandemic caught the markets off guard.
The relatively stronger rand, which is due to a weaker dollar, will likely act as a cushion against what appears to be building inflationary pressures, thus helping the Reserve Bank keep interest rates at record lows as the economy continues to struggle.
Inflation has been relatively benign in recent months, primarily because of the weaker economy, allowing the Bank to cut rates to help the economy recover from the fallout of the Covid-19.
But the recent pick-up in international oil prices and subsequent record high fuel prices in SA could drive up inflation, which the Bank forecasts to average 4.3% in 2021 and 4.4% in 2022.
The spot price of Brent crude has risen about 30% to $66 per barrel since the start of the year, contributing to steep increases in the retail price of petrol and diesel at the pump in April.
Power utility Eskom has also hiked electricity tariffs 25% in April.
Investec chief economist Annabel Bishop said in a note that markets are displaying exuberance on the perceived strength of US economic recovery, leading to risk-on sentiment, which helps the rand.
“But rapid swings in financial market sentiment towards risky assets in either direction are common,” she said. “Consequently, the domestic currency will remain erratic, swinging rapidly both stronger and weaker, as global market events continue to impact its direction.”
The consumer price index eased to an annual 2.9% in February, down from 3.2% in January; that month saw the lowest rate of inflation since June 2020 and was well within the Bank's target band of 3%-6%.
Update: April 15 2021
This article has been updated to reflect movement in the rand.
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