South Africa: Rand continues to strengthen in August
August 18, 2016
Like other emerging economy currencies, the South African rand has emerged from the post-Brexit turmoil unscathed. In the past month it has strengthened significantly, closing the trading day at 13.33 ZAR per USD on 18 August. This marked a 6.7% appreciation over the same day in July and a 14.0% appreciation on a year-to-date basis, though the rand was still 3.0% weaker than on the same day last year.
The rand has benefited primarily from external events. Investors looked elsewhere for higher-yield securities after the Bank of England cut its policy rate and minutes from the U.S. Federal Reserve’s July meeting indicated that the majority of board members did not support a rate hike in September. This has benefited a number of riskier currencies, including the rand. The rand also received a small boost after South Africa’s municipal elections on 3 August ran smoothly, putting the center-right pro-business opposition party in control of major metropolitan areas.
The strengthening of the rand in the past month could easily be reversed as its appreciation has not been spurred by a broad strengthening of the economy. Political upsets in South Africa, such as the replacement of the Finance Minister in December last year, present downside risks to the currency while softer monetary policy actions in advanced economies pose an upside risk.
Author: Dirina Mançellari, Senior Economist