Analysts believe the rand will hold its own or slightly appreciate in value in the short term — but will drift down to about R8 to the dollar by year-end.
Much depends on how soon and how often the Reserve Bank cuts interest rates. There was a growing belief the first cut would come in September.
The rand was trading at around the R7,50 mark last week, a two and a half year high.
MMS International market analyst Michael Keenan said the differential between local interest rates and those in the United States and Europe was the key “rand-positive” factor. It was so marked by comparison with South Africa’s competitors that a rapid exodus of hot money was unlikely in the short term, Keenan said.
Also influencing investor sentiment were the government’s maintenance of fiscal disciplines, the imminence of a further credit upgrade for South Africa by international rating agencies, relatively resilient growth and the substantial rise in the gold price over the past year, from about $280 an ounce to the current $368.
Inflation, too, was on the decline, with expectations that by year-end the rate would be approaching the 3% to 6% band targeted by the government.
After surging before the Iraq war, the world oil price had settled within the target band of $22 to $28, and looked set to remain there.
This contrasted sharply with the US, where consumer demand was weak and the economy afflicted by structural flaws, including a huge trade deficit. This implied the dollar would weaken further.
Keenan said the International Monetary Fund had suggested R7,80 to the dollar as an “equilibrium level”. Assuming three interest rate cuts this year, he expected a reversion to between R8 and R8,50 by 2004.
Deutsche Bank spot trader Andy Foulser suggested the currency might furhter strengthen over the next three months, to about R7,20.
A strong influence on the currency would be the balance of payments figures. Deutsche’s economists had predicted that the current R2,6-billion trade surplus would slip into deficit by the end of the year.
Foulser said an overall rate cut of between 1% and 2% was possible by year-end. He agreed a rate of between R8 and R8,50 was probable by then.