ARTICLES

Rand Strength

The currency of a country can be compared to the shares of a listed company. If a company is expected to do well and make profits, then its shares will strengthen relative to other shares. If a country is expected to do well and prosper, then its currency will strengthen relative to other currencies.

Investor confidence in South Africa is now being bolstered by:

1. The great start of the newly appointed government of national unity (GNU).
2. The reduction in our inflation rate in August to 4,4%.
3. One hundred and seventy days without loadshedding, which looks set to continue.
4. The sharp drop in the price of petrol which puts money into everyone’s pocket.
5. The beginning of a period of declining interest rates.

These factors have created enormous optimism about the South African economy among both local and international investors.

Money is flowing into the country as international investors take advantage of the disparity between interest rates here and those in first world economies. Since the advent of the GNU, R18,5bn of foreign cash has poured into the South African capital markets.

The rand has benefited directly and closed at R17.36 to the US dollar at 9pm on Friday 20^th September 2024. This is its strongest close since February 2023. Consider the chart:

The chart shows how the rand was weakening in the first half of 2023 and reached a low point of R19.62 to the US$ on 26^th May 2023. Since then, while volatile, it has been strengthening steadily, culminating in the sharp improvement since the GNU began its work. Last week it broke below the cycle low of R17.75.

As the rand strengthens, there is an immediate impact on the cost of transport in South Africa which puts more money into the pocket of every consumer from the wealthiest to the poorest. According to the Central Energy Fund (CEF), the petrol price is expected to fall by a further R1.24 per litre next month.

Technically, the rand/US dollar exchange rate has broken out of the triangle it was in, between the beginning of 2023 and the end of April 2024. This always meant that it was entering a period of greater strength. In our Confidential Report of April 2024 we said about this triangle, “...as you can see the triangle is narrowing steadily towards an inevitable break out that will determine its future direction.”

A stronger rand is obviously negative for the many rand-hedge shares on the JSE and positive for importers who will be paying less for what they bring into the country. But the overall impact of rand strength is enormously positive because it reduces inflation and encourages overseas investment. It is a solid vindication of the various efforts of the GNU to move us towards economic growth.

In our view, the South African economy is like a light switch – it is either on or it is off. The end of loadshedding and the results of our elections mean that after more than ten years of low growth, we are now headed into a period of much stronger growth. This will reduce unemployment and the crime rate. Everyone will be better off, especially those who have managed their finances conservatively.

The move to lower interest rates will also have a beneficial impact on the entire world, importantly, our major trading partners like Europe and America. The general shift towards risk-on means that emerging market currencies like the rand will continue to benefit.

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