The rand strengthened to a 13-month high on Friday, supported by improved investor sentiment on signs the domestic economy is starting to gain momentum.
At 1pm, the rand was 0.7% higher at R17.63/US$. It earlier hit R17.59 against the greenback, a level not seen since late July 2023.
The rand’s gains come ahead of US core personal consumption expenditure data, a key inflation reading, later on Friday that could cement bets on a Federal Reserve interest rate cut next month.
Analysts have linked recent rand strength to a structural improvement on the supply side of South Africa’s economy, with the country not witnessing rolling power cuts for over 150 days thanks to a big improvement in state-owned power utility Eskom’s performance.
“There have been no power cuts in South Africa for several months, which may not sound very impressive at first, but this has not happened in South Africa for years,” Commerzbank FX analyst Volkmar Baur said in a research note.
Power cuts have hampered South Africa’s economic growth for over a decade, with outages on a record 335 days last year.
Inflation also appears to have turned a corner. Data released on Thursday showed annual producer inflation dropped to 4.2% in July.
Inflation down
July consumer inflation fell to a three-year low of 4.6%, falling close to the midpoint of the South African central bank’s 3-6% target range and bolstering expectations the bank will cut its main interest rate for the first time in four years next month.
Baur said lower domestic interest rates could stimulate further investment and structural improvements in the economy. “This positive development reduces the risk premium that the foreign exchange market has placed on South Africa in recent years and strengthens the rand.”
South African Reserve Bank governor Lesetja Kganyago said on Thursday that the country was getting to grips with reforms that could lift its growth potential. — Bhargav Acharya and Alexander Winning, (c) 2024 Reuters
