- The rand strengthened to R16.82 per dollar on Friday as the dollar remained on the back foot.
- Bets are increasing that the Federal Reserve will cut rates twice next year amid pressure from US President Donald Trump.
- A Bureau for Economic Research report also showed inflation expectations are at a 25-year low.
- For more financial news, visit News24 Business.
The rand traded at its strongest in almost three years as the prospect for further US rate cuts continued to undermine the dollar, and the ANC’s National General Council (NGC) ended on Thursday evening with several positive notes for investors.
South Africa’s currency advanced to about R16.82 on Friday, around the strongest since January 2023, before paring gains to trade at R16.86 in mid-morning trade. The rand’s advance came against a backdrop of general dollar weakness, as traders bet that the greenback would be undermined as pressure mounts on the US Federal Reserve (Fed) to cut rates.
“The Fed will probably be pushed into cutting further than they are acknowledging at this stage,” Nolan Wapenaar, co-chief investment officer at Anchor, told News24. “As the US cuts further, we expect that this will further erode the dollar’s strength, supporting the rand a little more.”
The Fed cut its benchmark rate by 25 basis points on Wednesday in a widely expected move, although two members of its committee wanted rates to remain unchanged, while one member lobbied for a larger cut. While the Fed hinted it may only lower rates once more in 2026, bets are increasing on at least two cuts given that President Donald Trump’s administration has pressured the central bank to adopt a looser monetary stance.
Fed chair Jerome Powell is also set to be replaced when his term ends in May 2026, with market participants expecting his replacement to be a candidate more friendly to White House lobbying for lower rates.
While the SA Reserve Bank (SARB) is also expected to institute as many as two 25 basis point rate cuts in 2026, that would still leave local benchmark rates significantly higher than the US. SA’s repo rate of 6.75% compares with inflation that reached 3.6% in October.
By contrast, the US key rate is set to a range of 3.5% to 3.75% compared to inflation of about 3%. SA’s higher real interest rates (rates minus inflation) help attract so-called carry trades, in which investors take money from low-interest rate environments and invest in higher return assets abroad.
This has helped attract inflows in SA bonds, which have 10-year yields of about 8.4% versus 4.16% for similarly dated US Treasuries.
Stars have aligned for the rand as local reforms gather pace, the dollar weakens, precious metals rally, and foreign investors buy SA government debt for a world-beating real return.
— Tom Gale from Standard Bank
“Mining companies have been selling dollars as they convert sales at higher prices of gold and platinum group metals back into rand,” Gale, from Standard Bank’s global markets trading desk, told News24.
Gale says the formal adoption of a lower 3% inflation target for the SARB has also buoyed the currency’s purchasing power as it entrenches lower future inflation expectations.
“Lower inflation means a higher relative purchasing power for the currency,” said Gale.
The Bureau for Economic Research (BER) released its fourth-quarter survey of inflation expectations on Friday, which showed price-growth expectations fell to the lowest in 25 years. Lower inflation expectations are also positive for bond market inflows as investors can more safely allocate capital to the securities, knowing their fixed income returns will be eroded less by rising prices.
READ | Inflation expectations drop to 25-year low following new 3% target
“The BER inflation expectations released today show a significant moderation in longer term inflation expectations,” said Ruen Naidu, a portfolio manager at Ninety One. “This has implications for improved purchasing power of the rand going forward.”
Bastian Teichgreeber, chief investment officer at Prescient Investment Management, says the rand is benefiting from a host of positive domestic factors, including a credible medium-term budget policy statement in early November and the improved inflation outlook.
“We’ve had a lot of good news over the last number of weeks – a very credible medium-term budget; the removal from the grey list; a Standard & Poor’s ratings upgrade. But I think the biggest factor is the lowering of the inflation target,” Teichgreeber told News24.
“From a macro-economic perspective, it’s a structural change in how we conduct monetary policy and that’s very positive for the country. Normally, I would say global factors matter more for the rand, but if you have a structural shift to lower inflation in SA, which is what we are seeing now, then that’s very, very positive.”
ANC commits to GNU
Domestically, the rand was also supported by the ANC’s NGC reaffirming the party’s commitment to a government of national unity (GNU) that includes the DA. The meeting also endorsed continued market reforms in electricity and freight logistics while expressing full support for President Cyril Ramaphosa, contrary to concerns that have surfaced in recent weeks that the party may remove him.
As the meeting was the first of the ANC’s wider membership since the formation of the GNU, party leaders had anticipated a robust debate on the inclusion of the DA in the coalition, given the latter’s allegedly “anti-transformation” policies. Instead, delegates supported the ANC leadership’s decision to form a GNU as “the correct strategic decision” of the moment.
READ | Carol Paton | It is all good over at the ANC, and the Kool-Aid tastes great too
Nevertheless, the NGC added provisos that the ANC leadership should more strongly counter the DA’s attempts to reverse transformation policies, such as its opposition to black economic empowerment (BEE), the expropriation of land without compensation and laws on language policies at schools.
Market reforms initiated by Ramaphosa, which have been opposed by the ANC’s allies in trade union federation Cosatu and the SACP as a guise for creeping privatisation, were accepted by delegates on the proviso that the state would remain the owner of essential economic infrastructure.
The gathering, which was not a decision-making forum, also made strong expressions of commitment to fight corruption, especially within the ANC’s own ranks.
“Elevated real rates and prudent macro policy in SA are attracting inflows,” said Naidu.
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