- The rand was trading below R13.85 on Tuesday morning, as the dollar slumped to four-month lows.
- US central bank authorities soothed fears about inflation, indicating that interest rates may not be hiked soon.
- In South Africa, the central bank still expects two hikes before year-end.
The rand strengthened to below R13.85/$ on Tuesday morning – its best level since mid-2019.
The local currency gained ground as the dollar slumped to four-months lows against a basket of currencies.
Comments by Federal Reserve officials soothed concerns about inflation in the US, and seemed to indicate that interest rates won’t be hiked any time soon. Higher interest rates would make the dollar more appealing.
Bloomberg reported that Governor Lael Brainard, Atlanta Fed President Raphael Bostic and St. Louis' James Bullard said they would not be surprised to see bottlenecks and supply shortages push prices up in coming months as the pandemic recedes and pent-up demand was unleashed, but much of those price gains should prove temporary.
"I think there will come a time when we can talk more about changing the parameters of monetary policy, I don't think we should do it when we're still in the pandemic," Bullard said on Monday.
In South Africa, however, the central bank indicated that it still expects a 25 basis-point increase in both the second quarter and in the fourth quarter of this year. Bloomberg reported that the market is now pricing in a 65% probability that the local repo rate will be 50 basis points higher by year-end.
After scaling R19/$ during hard lockdown last year, the local currency has been strengthening in recent months.
Apart from dollar weakness, the recent gains came amid relief that South Africa's government finances are not quite as dismal as was expected last year.
In the past week, Moody's, S&P Global Ratings and Fitch decided not to cut their ratings of South Africa deeper into junk with the latter noting that South Africa’s state finances have "improved substantially", despite continued "substantial risks to debt stabilisation".
South Africa has seen stronger-than-expected tax income, thanks in part to strong profits from the mining companies. Rallying commodity prices have also bolstered the country's exports, helping South Africa to achieve a current-account surplus of 2.2% of GDP, the first surplus since 2002.
While still limp, economic growth this year could also exceed some investors' low expectations, with a marginal increase expected in the first quarter.
But South Africa still faces large fiscal challenges, including ballooning government debt and treacherous public sector wage negotiations. The weak start to its vaccination programme and the threat of a third Covid-19 wave could additional pressure.
"A rise in local Covid-19 cases is becoming a point of interest for investors as they wait to see whether there will be lockdown restrictions imposed in the days and weeks to come, and what that effect will be on the local economy," Bianca Botes, director at Citadel Global.
On Tuesday morning, the rand was also stronger against the pound (R19.65) and the euro (R16.98).