The rand has broken through R14.00 to the US Dollar and is trading at levels last seen in January 2020.
The rand was one of the currencies which were the hardest hit after the COVID-19 pandemic started to spread around the world.
The local currency, along with other emerging market currencies, weakened significantly as investors were looking to safe havens when the pandemic gained momentum.
The rand traded at its lowest ever level to the US Dollar – R19.26 – in early April shortly after the lockdown started in South Africa.
It started to strengthen as confidence returned to global markets and money started to flow into emerging economies.
This year the global recovery from the COVID-19 pandemic continued and the risk appetite among investors is soaring.
This, in addition to local political developments, helped the rand to become on the world’s best performing currencies.
Over the past four weeks and on a year-to-date basis, the rand registered exceptional gains against the US dollar, the euro, and the British pound.
Bianca Botes, executive director at Citadel Global, said the rand recovered ground in April as the Federal Reserve in the United States reiterated its expected dovish stance.
The Federal Reserve said it was still too early to consider tightening monetary policy, while President Joe Biden moved to unveil his plans for a further $1.8 trillion stimulus package.
“As usual, the anticipation of massive amounts of liquidity for several months provided support for the rand and other risk assets,” Botes said.
Nedbank explained the key drivers behind the rand’s strength were strong global risk appetites, a weaker US dollar, robust commodity prices, and better-than-expected domestic fiscal outcomes.
It was also helped by encouraging signs that the ruling party started to take action against corruption within its ranks.
“Risk appetites among international investors are likely to remain healthy throughout 2021,” Nedbank predicted.
This risk appetite is fueled by the vaccine-led global recovery, the ultra-accommodative monetary policies of the world’s largest economies, and increasingly aggressive fiscal stimulus, especially in the US.
“The global drive to rebuild infrastructure and transition to green energy also bodes well for commodity prices over the medium term, although some correction is likely over the shorter term,” Nedbank said.
These forces are expected to eventually encourage greater interest in emerging market economies.
The rand will benefit from these trends, but the upside will be limited by domestic factors, particularly high fiscal risks, energy shortages and uncertain growth prospects.
“The effective rand is fairly valued based on our calculations of purchasing power parity. We think the upside for the rand is quite limited but expect the currency to hold value in 2021,” Nedbank said.
The chart below shows the US Dollar to the South African rand over the past two years.