The rand has been perky this week, thanks in large part to the shifting fortunes of forex markets on perceptions about the direction of US interest rates, which markets are now betting have peaked after data showed a significant braking of inflation in the world’s largest economy.

In the wake of the greenback’s steepest one-day slide in 2023 on Tuesday, the rand’s sails caught the global winds and extended gains on Wednesday to 18.14/dlr, its best level since 31 July. This was a stout gain of over 3% from 18.75/dlr at the start of trade on Monday.  

“A Bloomberg gauge of the dollar tumbled as much as 1.3% on Tuesday, the largest such drop since November 2022,” Bloomberg reported.

Read more in Daily Maverick: Dollar tumbles most in a year as traders bet on end of US hikes.

The reversal of the dollar’s fortunes was triggered by data which showed US consumer inflation had slowed more sharply than expected in October to 3.2%. Markets now see US interest rates not rising further, with cuts coming in the middle of next year if inflation maintains its downward trajectory. 

High US interest rates have supported the dollar by attracting investors in search of yield and greenback-based assets to the detriment of other currencies, including the rand.

The South African Reserve Bank’s Monetary Policy Committee has its last scheduled meeting for 2023 next week to decide on rates, and the developments of the past couple of days will be high on its radar screen. 

“South Africa’s Reserve Bank will decide next week Thursday on its interest rate stance but is expected to leave the repo rate unchanged. The rand has been very volatile … on changing expectations around US interest rates, which we continue to expect have peaked in their current cycle,” Investec chief economist Annabel Bishop said in a commentary on Wednesday. 

“The risk of another 25 basis point hike in both SA and US interest rates does remain, however. In particular, the differential between SA and US interest rates has narrowed further, to 2.75% from 3.00% in June, and 3.5% two years ago, which has added to rand weakness and so upwards inflationary pressures in South Africa,” Bishop added. 

Still, the global market flow is currently in the rand’s favour, and the currency’s break through the 18.20/dlr technical level – where it has faced resistance – may open the path to further gains. The currency did correct back to those levels in late Wednesday trade, signalling this is indeed a technical level that needs to be vaulted decisively.  

Beyond all of this, the rand frankly does not have a lot going for it. 

A spate of data suggests domestic economic growth is slowing from already anaemic levels, a state of affairs a new Harvard study has blamed largely on the unfolding collapse of the state.

Read more in Daily Maverick: New Harvard report dissects how state failure, spatial exclusion are curbing SA’s growth 

Stats SA data on Wednesday showed domestic retail sales rose 0.9% year on year in September after falling 0.3% in the year to August. This beat a Bloomberg projection of a 0.4% drop but is hardly shooting the lights out. 

A 0.8% rise on a quarterly basis means the trading sector will make a positive contribution to the third-quarter gross domestic product number, but this will be offset by declines in mining and manufacturing production for the same period. 

A third-quarter contraction may be on the cards after second-quarter growth of only 0.6%. 

Read more in Daily Maverick: Dismal September mining and manufacturing data bode ill for South Africa’s third-quarter GDP 

Elsewhere, the BankservAfrica Economic Transactions Index (Beti) – a measure of economic transactions between South African banks – fell in October to 131.0, its lowest level in almost a year, from a revised 133.5 in September. 

“While the Beti has already signalled that the economy lost momentum in Q3, October’s reading confirms that the moderation has continued into Q4. Although economic activity has generally surprised to the upside during the first half of the year, a growing number of indicators point to a lacklustre second half,” BankservAfrica said in a statement. 

To top it all off, prices for key South African commodities – gold being a glittering exception – have cooled, notably for platinum group metals. This means less foreign exchange revenue, a key base of rand support, flowing in from exports. 

On the bright side, the rand’s rally this week is to be welcomed as it will help to ease inflation pressures from imports, while potentially staying the SA reserve Bank’s hand on the rate trigger. 

But in many ways, the currency is, to quote a Jackson Browne song, running on empty. DM