Rand falls against the dollar as geopolitical tensions escalate

The rand began the week on a shaky note, sliding by 0.7% to R17.55 against the US dollar as investor sentiment remained clouded by escalating geopolitical tensions in the Middle East and the impending Medium-Term Budget Policy Statement (MTBPS).

As the fourth quarter unfolds, the rand has averaged R17.49 per dollar; however, experts anticipate a potential strengthening towards R17.00 as the year progresses.

Investec chief economist Annabel Bishop yesterday said the rand remained around R17.50/$1 on an escalation in geopolitical tensions globally, the moderate messaging from the US on interest rate cuts, and in the runup to the MTBPS.

Bishop said a slower, and less steep, US cutting cycle, with interest rate cuts now not expected at each Federal Open Markets Committee meeting in the first half of 2025, had weakened market optimism, dulling risk taking, and so seeing risk assets - including the rand - lose some ground recently.

“Substantially higher oil prices would also slow the downwards inflation trajectory, and the emergence of second round inflationary effects would negatively affect rate cut cycles, including that of the US, and so negatively affect the rand,” Bishop said.

However, Bishop said the rand was likely to average stronger for the quarter than it is currently running at, coming out closer to R17.20/$1, as the US makes two further 25 basis points cuts and South Africa one this quarter, widening the interest rate differential.

Bishop said this would bring the US cut to 75 basis points this quarter, and South Africa’s to only 50 basis points, which would most likely see the rand strengthen.

She said downward pressure on longer-term interest rates would be helpful for South Africa too, if the State’s borrowing trajectory eases.

“Finance Minister Godongwana has also said that cost-cutting measures are planned, and a lowering of the planned debt trajectory would be received very positively by financial markets, with rand strength expected,” Bishop said.

“While growth outcomes are modest this year, a strengthening economy over 2025 would boost the rand’s performance, although much will depend on the smooth function of the freight system which is still facing many challenges.”

BUSINESS REPORT