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South African Rand Extends Winning Streak As Global Sentiment Improves

August 25, 2020 at 19:07 by Andrew Moran

ZAR coins and banknotes of the year 2012 designThe South African rand is extending its winning streak against the US dollar as it continues to find support in global foreign exchange markets. With a fierce risk appetite and general optimism in the broader financial markets, investors are pouring into the rand. As the number of confirmed coronavirus cases comes down and the central bank indicating tightness in monetary policy, the rand may emerge as one of the top emerging market currencies.

According to the South African Reserve Bank (SARB), the compositive leading business cycle index surged 2.7% in June, up from a 4.9% decline in May. The indicator has rebounded since cratering at a record 6.8% in April. The index jumped on the increase in new motor vehicles sold and new residential building plans, but it was offset by a slowdown in money supply growth and a narrowing in the interest rate spread.

This comes soon after Lesetjia Kganyago, the head of the central bank, signaled that era of policy easing may be winding down. Since the height of the coronavirus pandemic in March, SARB has slashed interest rates by 150 basis points to 3.5%, but Kganyago suggests that this may no longer be necessary due to improved economic data and the public health crisis diminishing.

Government bonds firmed on Tuesday as the yield on the benchmark 10-year bond slipped one basis point to 9.305%.

Many experts believed that emerging market currencies had already peaked, but the performance of the rand compared to the Turkish lira shows a tale of two money instruments. Turkey has depleted its foreign reserves, taken on extraordinary levels of debt, and lost the confidence of the broader market.

Investors may get a better idea of how much South Africa is improving as the consumer price index (CPI) and the producer price index (PPI) will be released this week. The early estimates forecast a CPI reading of 1.2% in July and a PPI figure of 1% in July.

Despite health authorities warning about COVID-19 in South Africa, the country seems to have gotten the virus outbreak under control. The number of new infections has plummeted to a four-month low. South Africa has more than 611,000 cases and a death toll of about 13,000.

The rand is still down about 20% against the greenback, but it has significantly improved since hitting the bottom of 19.3416 per dollar.

The USD/ZAR currency pair tumbled 0.76% to 16.8387, from an opening of 16.9687, at 18:57 GMT on Tuesday. The EUR/ZAR fell 0.36% to 19.9303, from an opening of 20.0035.

If you have any questions, comments, or opinions regarding the South African Rand, feel free to post them using the commentary form below.

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