South African rand continues to recover on speculation of Federal Reserve rate pause

The South African rand recovered in early trade on Friday, extending a recovery from the previous session on growing expectations that the US central bank will stand still on interest rates this month.

Business Recorder reports that, at 06h45 GMT, the rand traded at 19.5875 against the US dollar, around 0.2% stronger than the last close. This positive momentum follows a volatile period for the currency, which hit a new record low of 19.9075 on Thursday but managed to end the day on a stronger note. The better outlook for the rand is most likely because of favourable US manufacturing data and comments by Federal Reserve officials, which have strengthened hopes that the Fed will not raise interest rates at its June policy meeting.

The weakened dollar, down approximately 0.1% against a basket of global currencies on Friday, has also supported the rand’s recovery. The Fed’s reduced probability of a 25 basis point rate hike has shifted market sentiment. According to the CME FedWatch tool, the likelihood of a rate hike has fallen to 20% compared to 50% a week earlier. This change in expectations has prompted investors to seek out riskier currencies, benefiting emerging market currencies like the rand.

May was challenging for the rand, as it experienced a decline of over 7% against the dollar. In addition, the currency faced headwinds due to negative investor sentiment triggered by allegations that South Africa supplied weapons to Russia and persistent power cuts.

Also read: Loadshedding fears cause South African rand to hit 3-year low

However, the recent recovery suggests that market conditions are stabilising, relieving the embattled currency.

In other news, South Africa’s electricity minister, Kgosientsho Ramokgopa, is set to provide an update at 12h00 GMT on efforts to address the ongoing power shortage. The government’s response to the crippling power crisis will be closely watched as it has significant implications for economic stability and investor confidence.

The government will also hold an auction for inflation-linked bonds and Treasury bills today, contributing to market dynamics. These debt instruments are crucial in managing the country’s fiscal affairs and attracting investor interest.

While the rand’s recovery in early trade is an optimistic development, how the currency will fare shortly remains to be seen. Geopolitical and economic factors, locally and globally, will continue to affect its performance. South Africa’s benchmark 2030 government bond, a key indicator of investor sentiment, has shown limited movement in early deals, with the yield down 0.5 basis points to 11.235%.

Market participants will closely monitor the rand’s progress, hoping the recent recovery will be sustained, contributing to a more stable and favourable economic environment.

Also read:

Economist warn – rand breaching the R20 mark to dollar ‘inevitable’

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