The rand has strengthened significantly over the past few weeks and has broken through R15.00 to the US Dollar on Tuesday for the first time since the COVID-19 pandemic hit.
After the coronavirus pandemic hit the world, the rand, along with many other emerging market currencies, weakened significantly.
The rand traded at its lowest ever level to the US Dollar – R19.26 – in early April as the lockdown in South Africa was in full force.
Since April, the rand strengthened as confidence returned to markets and money started to flow into emerging economies.
Investec chief economist Annabel Bishop said the rand averaged R15.93/USD so far this quarter and since mid-November, it has averaged R15.31/USD.
This strengthening happened despite negative economic news like credit rating downgrades by rating agencies Fitch and Moody’s.
Nedbank said the country’s trade surplus and portfolio inflows are partly behind the rand moving towards R15.00 to the US Dollar.
There is also a hunt for higher yields with ultra-low interest rates in advanced economies like the United States and Europe.
With the South African bond market currently offering some the highest real yields in the world, it is an attractive investment option.
Positive news about COVID-19 vaccines has also helped to ease economic concerns and prompt a move back into emerging markets, including South Africa.
These factors helped the rand break through the R15/USD mark this week, with some analysts predicting it may strengthen further.
The rand remains undervalued on a purchasing power parity basis and in the short term, it may even test the R14/USD level.
In the long term, the currency may face pressure because of structural problems in South Africa.
Bishop said structural problems remain to trip up sentiment, particularly the build-up of sovereign debt in most countries over the past year.
She added that risk-on sentiment cannot be taken for granted in global financial markets.
“With the Northern Hemisphere autumn, winter and spring typically a risk-on period anyway, the positive sentiment that has supported the rand cannot be relied on to continue throughout 2021,” Bishop said.
USD to ZAR historic chart
The chart below shows the US Dollar to the South African rand for the past year.