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South Africa’s rand has plummeted from R17.10 to R18.76 to the US Dollar in three months, which reversed its gains following the formation of the government of national unity.
The local currency had a rollercoaster ride in 2024. It started the year at R18.29 to the greenback but weakened to R19.23 ahead of the general elections.
Fears around a left-leaning and business-unfriendly government pushed the rand to much weaker levels than where it should be trading.
However, the Government of National Unity (GNU), considered the best possible outcome for the country, calmed investor fears.
However, it was not only local politics which bolstered the local currency. Data from China has also boosted the value of the rand.
At the beginning of June 2024, Stanlib chief economist Kevin Lings said the steady improvement in China’s economic data supported the local currency.
“It’s not as if China is doing fantastically well,” Lings said. “It’s just that at the end of last year, China seemed to be in significant trouble, but during 2024, they’ve initiated several reforms.”
Improved economic performance from the world’s second-largest economy tends to result in an uptick in commodity prices as it is the largest consumer of many resources.
As a large commodity exporter, South Africa benefits from expected improvements in foreign currency earnings and economic growth, boosting the rand’s value.
In particular, Chinese demand for South Africa’s mineral exports is a vital source of foreign exchange earnings for the country.
Between June 2024 and September 2024, the rand strengthened from R18.97 to R17.10 to the US Dollar.
Many currency experts predicted that the rand could strengthen further from these levels, with some experts predicting it could break the R15 barrier.
Old Mutual economist Johann Els calculated that the rand should be trading much stronger than it is, with its real value closer to R15.00 per US Dollar.
Renowned economist Dawie Roodt, through a calculation using a basket of goods, reached a fair value of around R8 to R9 to the dollar.
However, he explained that the rand is always undervalued based on PPP. “The extent of the undervaluation differs over time, but it hovers around 50%,” he said.
This means the rand should trade within its historical range based on PPP between R16 and R18 to the dollar.
However, in December 2024, the rand weakened to its lowest level in six months, reaching R18.90 on 31 December 2024.
Since then, the rand has strengthened somewhat to R18.76 against the US Dollar, but it remains much weaker than expected.
Rand rebound expected
On 27 December 2024, Bloomberg reported that positioning in the options market suggests the rand is poised for a rebound that may be as steep as its rapid decline in December.
The rand had its worst December performance since 2015 and its biggest quarterly decline in more than two years.
That came after hedge funds liquidated long rand-dollar futures at the fastest pace on record in the week through 17 December 2024.
The rand wiped out all its 2024 gains and is hovering around its weakest level since the May elections.
This has encouraged options traders to bet that the fundamentals that drove the pre-December rally will return at the beginning of 2025.
Six-month risk reversals — the premium of options to sell the currency over those to buy it — are at the lowest on record.
The one- and three-month tenors are also close to record lows. That means the cost of hedging against further rand declines is now cheaper than it’s been in years.
This gave a promising sign that the rand’s December shakeout may have run its course, and it is set to have a better start to the year.
Rand emerges as a leading EM currency
For the first time since 2016, the rand was among the five best-performing emerging-market currencies of the year.
A steep retreat in December saw the rand surrendering its year-to-date gain for a decline of about 2% in 2024. This was a year in which just three emerging-market currencies advanced.
That places it fifth after the Malaysian ringgit, Hong Kong dollar, Thai baht and Peruvian sol among 24 major developing-nation currencies tracked by Bloomberg.
Developing-nation currencies have struggled in 2024 as robust US economic growth bolstered the dollar.
However, the rand’s relative resilience has been aided by rising investment levels, lower inflation, and structural reforms.
The South African Reserve Bank also maintained its favourable interest-rate premium over the greenback.
“South Africa’s carry appeal remains strong as inflation and expectations stay anchored,” said Sebastien Barbé, head of EM research and strategy at Credit Agricole.
He was referring to a strategy in which investors borrow dollars to buy higher-yielding currencies.
According to Bloomberg calculations, the rand’s forecasted total return for 2025, based on expected interest rates and exchange rate values, is 15%.
Credit Agricole forecasts an exchange rate of R16.40 per dollar by the end of 2025. That implies a gain of about 13% from the current level.
This is more bullish than the median of 18.07 in a Bloomberg survey of analysts.
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