The rand has completed one of its best weeks in recent months by maintaining its value at below the R10 to the dollar level, with analysts expecting the good performance to last for the foreseeable future.
Last Thursday the currency shrugged off the Soweto train station bomb blasts to close at R9, 98. Since then it has touched three-month best levels of below R9, 90.
Late on Thursday it was trading at R9, 87 to the dollar, R9, 86 to the euro and R15, 49 to the pound following a half a percentage point rate cut by the United States Federal Reserve.
“It is important to remember that the rand is still significantly undervalued,” said Dawie Roodt, chief economist at PLJ Financial Services. Roodt pointed out that by contrast, the US has an overvalued currency and equity market.
He attributed the recent rand buoyancy to foreign holding repatriation by exporters. “When the rand weakens, exporters hold their foreign currency earnings offshore. When it improves, they move their holdings locally, which leads to a stampede and rise in value,” he explained.
Other contributing factors this week were improved gold and platinum prices. Roodt expected the currency to hover at about R10 to the dollar at least until the end of the year. Beyond that, he expected it to weaken, largely due to a large differential between inflation rates in South Africa and the US, the expected relaxation of exchange controls to be announced in next year’s Budget, and the forward book.
The latter is an instrument used by the Reserve Bank to offer a predictable, future dated exchange rate to market participants.
If, at the appointed date, the actual exchange rate is higher than the guaranteed level, the bank makes a loss equal to the difference. This creates the net open forward position, which currently stands at $1,7-billion.
The rand’s performance will depend on economic data due to be released over the next three weeks. In two weeks Statistics SA will release inflation figures for October. Analysts expect CPIX (inflation minus mortgage rates) to continue to rise towards 12%, before falling towards the end of the year. At the end of the month the Reserve Bank’s monetary policy committee meets to review interest rates. Commentators expect the rate to be left untouched.