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- On Friday, the rand saw its biggest gain in a day since President Cyril Ramaphosa took over the ANC presidency in 2017.
- The rally was mainly due to a weak dollar as the Fed indicated it would keep US rates lower for longer.
- The rand’s rand could help secure fuel price cuts at South African pumps on Wednesday.
- For more articles, visit www.BusinessInsider.co.za.
The rand saw an almighty rally on Friday, soaring to R16.56 / $. Just 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 presidency of the ANC, Business Day reported.
The rally is mainly due to the weakness of the dollar. This week, Federal Reserve chief Jerome Powell announced a big change in his policy to deal with inflation, which could mean delays in raising interest rates. The Fed will tolerate higher levels of inflation through “average inflation targeting” in the future, he said.
The Fed will target an average inflation rate of 2%. Powell also indicated that interest rates will remain at or near zero as the US economy struggles to recover from the coronavirus crisis.
Lower interest rates can be negative for a coin, because merchants earn less when they own the coin.
Even after big cuts this year, South Africa’s interest rate remains strong in a world where some lenders are payment others for the privilege of lending money to others. In many countries, interest rates are below zero.
And this week, an unexpected spike in inflation in South Africa may have eliminated any chance of further cuts, bolstering the rand.
Consumer inflation unexpectedly soared to 3.2% in July, Statistics South Africa announced on Wednesday. This is a massive 45% increase from 2.2% in June, and the largest increase in a month since February 2016.
While some economists expected an interest rate cut or two this year, the nasty inflation surprise may deter the South African Reserve Bank’s monetary policy committee from cutting rates 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 fallen by 300 basis points, 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 is now 67% cheaper than it should theoretically be against the dollar.
The rand closed at R22.13 / pound and R19.73 / euro on Friday night.
Impact on fuel prices
The latest strength in the rand could help secure cuts in gasoline prices next week. South Africa’s fuel prices are determined by the rand and oil prices, as the country imports most of its oil.
Currently, 95 gasoline is on track for a reduction of about 3 cents a liter, while 93 gasoline could still increase by 6 cents. Diesel could be cut by 19c.
The SA fuel price is adjusted on the first Wednesday of each month.
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