Rand Report: Rand bounces back as economic sentiment improves. Image: Supplied

Rand Report: Rand bounces back as economic sentiment improves

The South African rand strengthened against all 19 currencies we monitor. Recent rand gains can be attributed to a few factors. Find out more

by Sable International

20-06-2023 17:46

in Business & Finance

Rand Report: Rand bounces back as economic sentiment improves. Image: Supplied

The South African rand strengthened against all 19 currencies we monitor. Recent rand gains can be attributed to a shift towards riskier assets, following the resolution of the US debt ceiling threat. Moreover, the decision by the US Federal Reserve to pause its rate hiking has added to the positive sentiment. The rand mounted a significant rally over the past two weeks, recovering from its heavily oversold position.

The USD/ZAR pair moved 2.86% lower last week, with a combination of rand strength and US Dollar weakness causing the pair to plummet. After kicking off at R18.72 on Monday and reaching a low of R18.12, the pair ended the week at R18.18.

The GBP/ZAR pair encountered a less pronounced move to the downside, with recent sterling strength partially offsetting ZAR tailwinds. The pair depreciated by 0.94% during the week, moving lower from an open price of R23.53. After losing steam around the R23.10 level, the pair closed off the week at R23.30.

The EUR/ZAR pair also made a move to the downside, falling by 1.14% during the weekly trade. After opening at R20.12 and touching a low of R19.77, the pair rounded off the week at R19.88.

On the local data front, there was positive news for South African production. Mining production increased by 2.3% (YoY), despite the anticipated -1.3% reading. Gold production recovered nicely too, rising by 27.4% (YoY), exceeding market forecasts, and bouncing back from the 21.6% decline in the prior period. Retail sales also came due and rose by 0.4% over the month of April. This figure exceeded the anticipated decline of 1.0%.

It has been a positive week for South African electricity generation, which has reached the highest level in months. With loadshedding pulling back to Stage 1, this factor has contributed to this period of short-term ZAR strength.

In the United States, the US inflation rate came out at 4.0% in May, declining from 4.9% in April and exceeding the anticipated downtick. Furthermore, producer prices decreased by 0.3% (MoM). On Wednesday, the Federal Reserve opted to hold interest rates at 5.25%. This was the first time in 15 months that the Fed has not raised its rates. The Fed was vocal about the fact that this pause does not indicate an end of the hiking cycle. Many predict there will be further rate hikes in the future, but as always this remains data dependent.

The United States Dollar Index

There was some serious volatility around the Fed interest rate event, and the USD sold off on the news of the pause in the rate hikes. The Dollar Index (DXY) declined by 1.27% over the last week, with the greenback losing 1.97% and 1.73% against the Pound and Euro, respectively. GBP/USD moved from 1.2572 to 1.2814 during the week. The EUR/USD pair opened around 1.0750 and closed at 1.0933.

In the UK, the unemployment rate for April improved to 3.8%, in line from expectations, compared with the previous figure of 3.9%. Additionally, the claimant count change for May declined by 13,600, despite the expected increase of 22,000. This reading indicates a significant improvement when compared to the previous increase of 23,400. On Wednesday, month-on-month GDP figures indicated a 0.2% increase, in line with expectations, after the previous month’s decline of -0.3%. Despite several political scandals, the currency has remained buoyant, with the markets brushing these off and focusing on the possibility of future Bank of England (BoE) rate hikes.

Over in the Eurozone, our attention was on the European Central Bank’s (ECB’s) interest rate decision on Thursday. As expected, the ECB raised rates by 25 basis points, from 3.75% to 4.0%. This brought interest rates to their highest level since the global financial crisis in 2008. The Eurozone inflation rate for May was also released on Friday, and declined from 7.0% to 6.1%, aligning with market expectations. However, as highlighted by ECB President Lagarde, there is still considerable work to be done in this regard.