The rand was the top performer in emerging markets on Wednesday when it rose 2% to R17.97 per US dollar (USD) and traded at R17.63 per dollar on Friday night.
The local currency’s strengthening momentum gained momentum this week, reaching its strongest level in five weeks when it fluctuated below the average of R18.15 per dollar over the past 50 days, for the first time this year.
This relief comes after the rand has been performing poorly for almost two months and has traded above the R19 per dollar. According to Gerhard van Onselen, senior analyst for Business League, slightly stronger commodity prices have provided support over the past few days.
“Of course, a recovery in the rand-dollar exchange rate was expected after such an acute depreciation, but we will have to see how the continued isolation, policy uncertainty and other market barriers affect the local currency,” he says.
Moody’s downgrade of the local currency at the end of March hit the rand. With the global recession looming, investors see emerging markets such as South Africa as risky, compounded by questions about the country’s growth prospects in the face of the Covid-19 pandemic and other domestic growth barriers.
Daniël du Plessis of Sakeliga explains that it is important to remember that the rand – and assets valued in rand – are typically high-risk investments. “We have seen the rand weaken drastically in times of uncertainty, even if there is no direct effect on South Africa. Investors would rather invest in things like first-world government bonds when there seems to be turmoil on the way. ”
With the current appreciation of the rand against the dollar, investors may be a little more comfortable with riskier assets, Du Plessis says.
The currency has already weakened by more than 20% this year, the second worst performer after Brazil.
The rand’s exchange rate with units such as the dollar, euro and pound is important because it has implications for how much South Africa pays for oil and ultimately the consumer pays for fuel, as well as how much money you have to save to travel overseas or foreign money if buy investment.
According to the Reserve Bank, a country’s status of transactions with the rest of the world, or its balance of payments, is a direct determinant of the exchange rate. The stronger rand brings a glimmer of hope as it can reduce some products’ import costs.