Rand Report: Rand strengthens as rate cut cycle approaches

The South African rand opened the week at R17.82 against the US dollar, having recently hovered around its R17.67 support zone. There was optimism for further strengthening, especially with an expected US interest rate cut on the horizon. However, the rand slipped, closing Tuesday at R17.92.

This weakening was mainly due to the release of US inflation data (CPI) on Wednesday. The figures raised questions about the Federal Reserve’s next move: whether it will opt for a standard 25 basis-point (bps) rate cut or a more significant 50-bps cut at its September policy meeting. Current market forecasts fully price in a 25-bps cut, with a 30% chance of a 50-bps cut. Positive news from South Africa, such as strong demand for government bonds and a 1.7% rise in July’s manufacturing figures, had little impact on supporting the rand.

US inflation in August grew by 2.5%, the smallest year-on-year increase since February 2021. While this news temporarily helped the rand hold some gains, the mixed data reduced the likelihood of a larger 50-bps rate cut. The rand remained relatively unaffected by July mining figures showing another decline in output. By Thursday’s close, the rand traded at R17.76 to the dollar.

On Friday, the rand gained further against a weaker US dollar, as markets continued to speculate on the size of the upcoming US rate cut. Like other risk-sensitive currencies, the rand often responds to global economic shifts, particularly US monetary policy, in addition to local data. Looking ahead, investors will focus on South Africa’s August consumer inflation figures on 18 September and the South African Reserve Bank’s (SARB) interest rate announcement on 19 September, with economists predicting a 25-bps cut. The week ended with the rand at R17.73 to the dollar, setting the stage for a crucial week of interest rate decisions and inflation updates.

Upcoming market events

Wednesday, 18 September:

GBP – Inflation rate

ZAR – Inflation rate

USD – Fed interest rate decision

USD – FOMC economic projections

Thursday, 19 September:

GBP – BoE interest rate decision

ZAR – Interest rate decision

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