Africa-Press – South-Africa. South Africa’s rand strengthened below R17 per dollar for the first time since February 2023, while stocks and bonds rallied as investors applauded a mid-term budget update that included a lower inflation target and improving fiscal outlook.
The rand gained as much as 0.8%, hitting its strongest level in almost three years, on expectations the central bank will hold interest rates higher for longer to subdue price increases.
The Johannesburg stock benchmark was the world’s best-performing equity index on Thursday, and yields on government rand bonds sank to the lowest in seven years.
Lowering the price-growth goal to 3% from 4.5% will, over time, decrease inflation expectations, creating room for lower interest rates that would boost economic growth, the National Treasury said in a statement.
The central bank cut its benchmark rate twice this year but signaled it will stay on hold in the coming months until the consumer price index is at or near the new target.
The rand is “benefiting from relatively positive global sentiment and from the South African finance ministry officially adopting a lower target for inflation that may result in the SARB having less room to cut interest rates,” said Piotr Matys, a senior FX strategist at In Touch Capital Markets.
“The prospect of monetary policy divergence between the SARB and the Federal Reserve is a major driving factor for the rand.”
The rand traded at 16.9831 per dollar by 1:34 p.m. in Johannesburg, extending a seven-day winning streak. The currency has returned more than 13% in the dollar-funded carry trade this year, according to data compiled by Bloomberg, as the greenback weakened and the Fed cut interest rates.
Foreign inflows into the government bond market swelled to R175 billion in the year through October, compared with R73 billion for the whole of last year, according to National Treasury data.
The National Treasury is also cutting the amount of debt offered at its weekly auction, curbing supply of new bonds.
“In an environment where carry is king, South Africa still remains attractive from a bond-market perspective and this will likely support the rand in the short term,” said Anders Faergemann, a portfolio manager at PineBridge Investments.
“The change to the central bank’s inflation target was well telegraphed but above all it shows a newfound maturity on the institutional front and provides an improved backdrop for investing in the local bond market.”
The yield on benchmark 2035 government rand bonds fell seven basis points on Thursday to 8.61%, the lowest on a closing basis since March 2018. The rate on the country’s dollar bonds due 2036 dropped eight basis points to 6.14%.
Elevated precious-metal prices have also supported rand gains, according to Lee Hardman, a senior foreign-exchange strategist at MUFG.
Gold soared to a record well above $4,000 an ounce last month, while silver and platinum prices have also climbed. Raw materials account for more than half of South Africa’s export earnings.
The FTSE/JSE All-Share Index climbed as much as 2.5%, with investors flagging rising metal prices and the budget as catalysts along with a potential credit-rating upgrade from S&P Global Ratings on Friday.
The rating company assesses South Africa’s credit rating at BB-, with a positive outlook, suggesting the next move will be up.
“A lot of it has got to do with the medium-term budget that has led to some positivity around SA Inc.,” said Martin Smith, a portfolio manager at Anchor Capital. “I think you could see a further bounce should S&P upgrade tomorrow. SA Inc. has still got some upside.”
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