The rand strengthened to a fresh 13-month high on Friday but stocks on the JSE ended the week lower in a mixed week of trading.
The domestic currency surged to around R17.60 to the US dollar, its highest since July 2023, reflecting growing optimism about South Africa's economic prospects and expectations of imminent rate cuts by the US Federal Reserve.
However, the JSE All Share Index eased by 0.6% to close at 83 749 on Friday, mainly pressured by resource-linked stocks and financials offsetting the advances in tech giants Naspers, Prosus and industrials.
The JSE shed about 0.7% for the week but rose 1.2% on a monthly basis.
The positive sentiment in the rand, which has gained nearly 4% in the year-to-date, has been supported by the formation of the Government of National Unity following the May 29 election, as well as the improved economic outlook due to the end of load shedding.
Economic activity is also expected to get a boost from looming interest rates cut in four years by the SA Reserve Bank, which has noted potential upward revisions to growth forecasts and better inflation control after July's headline consumer price inflation fell to a three-year low of 4.6%.
Investec chief economist Annabel Bishop on Friday said the rand strength was expected over the medium-term.
Bishop said the rand and emerging markets currencies were expected to strengthen further over the second half of 2024, with the domestic currency likely averaging R17.70/$1 in the fourth quarter, after the third quarter’s R18.00/$1, gaining on positive investor sentiment.
“The US is expected to also put through its first interest rate cut (and also of -25bp), in September however, reducing the impetus for rand strength as the interest rate differential does not widen between US and SA interest rates.
“That is, when the US cuts its interest rates, absent a cut in SA, the drop in US interest rates in comparison to SA’s interest rates aids rand strength, while a SA interest rate cut straight after the US Federal Open Market (FOMC) meeting instead weakens the effect.
“Consequently, the US cutting cycle is likely to be quicker than the SA interest rate cutting cycle, still providing an underpin for rand strength through to end 2026 at least, although a longer US interest rate cut cycle would prolong rand strength.
“Risk factors persist for SA, inhibiting faster rand appreciation, on its large state debt and deficit ratios, freight and logistics impediments to growth, as well as slow progress in meaningfully improving the environment for doing business.”
Nedbank economist Crystal Huntley said high-frequency statistics reflected a feeble uptick in economic activity over the second quarter, reflecting base effects, better operating conditions, and a weak but positive response in demand to falling inflation.
Huntley said that altogether, real gross domestic product (GDP) was forecast to grow by 0.4% quarter-on-quarter following a 0.1% contraction in the first quarter.
“The GNU has lifted consumer and business confidence, which should trickle down to economic activity. The absence of load-shedding created a more favourable environment for producers,” Huntley said.
“Lower inflation, especially on essentials such as food and fuel, supported consumers' purchasing power and real incomes, offsetting the ongoing squeeze from high interest rates. We view the risks to our second quarter GDP forecast as relatively balanced. Resolving the country's energy and logistical constraints remains the key to unlocking faster growth over the medium to longer term.”
BUSINESS REPORT