On Monday, the rand fell below R18.35 to the dollar amid easing election fears, strength in commodity prices and renewed optimism about the possibility of a US interest rate cut. This was the highest level since mid-January.
By lunchtime, the local currency was trading around R18.36, up from R19.32 about a month ago.
Annabelle Bishop, chief economist at Investec, said the rand was finding some stability around higher levels as the political risk of an ANC-EFF coalition government appeared to have faded nationally.
Concerns that the ANC could form an alliance with the EFF after national elections later this month have weighed on local markets since the beginning of the year.
However, recent polls show that these concerns have subsided, with non-residents becoming net buyers of domestic bonds since late April, Bloomberg reports. After being net sellers in February and March, foreign investors became net buyers of R3 billion worth of South African bonds in April.
Read | 'Too juicy to ignore': asset managers bullish on SA bonds despite election risks
Kasparas Treunich, portfolio manager at Griffon Asset Management, added: “It looks like interest rate cuts are still continuing in the US and Europe, giving further reason for the rand to appreciate.”
As traders await U.S. inflation data that could help determine whether and how much the Federal Reserve will be able to lower borrowing costs in 2024. , the dollar continued to consolidate against other major currencies on Monday.
Lower US interest rates are positive for the rand and other emerging market currencies, making yields look more attractive by comparison.
Traders are pricing in further Fed easing this year after recent weaker-than-expected U.S. labor market data and the Federal Reserve ruled out further interest rate hikes. I'm here.
Markets are pricing in about an 80% chance of a rate cut before the Fed's September meeting, with a total rate cut of about 40 basis points (bps) expected in 2024, according to LSEG data.
Some rate setters have debated whether rates are high enough, and comments from Fed officials last week were mixed. Rising consumer inflation expectations revealed in Friday's survey could further complicate the debate.
With recent data showing the economy slowing slightly from the robust growth seen in 2023, investors are waiting to see how sticky inflation will be.
The market has an opportunity this week, with US inflation data coming in the form of the Producer Price Index (PPI) on Tuesday, followed by the Consumer Price Index (CPI) on Wednesday.
“Wednesday's US inflation data will determine whether the rand hits a new high this year,” Treunich said. The rand briefly reached an intraday high of below R18 in mid-January.
“The CPI is a huge and polarizing event for the overall market,” said Francesco Pesole, currency strategist at ING.
“Given the unexpected upside trend in recent inflation data, it is possible that the market will hold onto the dollar in the lead-up to the event,” Pesole added.
“For the U.S. dollar to really come off the wheels, the incoming data needs to show disinflation, not just weak spots here and there,” said Matt Simpson, senior market analyst at City Index.
Treunicht said the rand was also supported by rising commodity prices. “Some commodities, particularly copper, have rallied in the past few weeks, pushing the rand and other commodity-based currencies higher.
“Platinum and coal also seem to have bottomed out, which is particularly important in South Africa,” Treunicht said.
The Global Platinum Investment Council reported on Monday that the platinum market is expected to remain in the red this year due to weak demand for electric vehicles.
Platinum prices have returned to above $1,000 an ounce after falling below $880 an ounce in February.