The South African rand strengthened to R15.79 against the US dollar this week, driven by improved confidence in the country’s inflation outlook and the credibility of monetary policy, according to Efficient Group Chief Economist Dawie Roodt.
Roodt says the currency’s appreciation reflects more than global market dynamics, pointing to domestic policy signals as a key driver. He highlights lower inflation targets and market confidence in the South African Reserve Bank’s ability to meet them. “Lower inflation reduces currency volatility and risk, which increases foreign capital inflows and supports a stronger rand,” Roodt says.
Despite the recent gains, the rand remains undervalued, though less so than previously. Further appreciation is possible, but likely limited. “Levels around R15.50 are possible, but the rand is approaching a range where sustained strengthening becomes less likely.”
Roodt is of the view that the stronger rand is unlikely to significantly affect import and export volumes. While stronger commodity prices support export earnings, currency strength may offset some of those gains. He adds that the combination of a firmer rand and lower oil prices is positive for the economy, particularly for import costs.
South Africa’s exposure to currency movements is constrained by its limited manufacturing base, with the automotive sector remaining under pressure regardless of exchange-rate movements. Agriculture, however, remains vulnerable to rand appreciation due to its export dependence.
Markets respond, real economy lags
For businesses and investors, Roodt says the currency move is largely positive. Financial markets have reacted favourably, although this has yet to translate into stronger investment in the real economy. “The response has been visible in financial markets, but investment in productive sectors such as mining and manufacturing remains subdued,” he says.
According to Roodt, the stronger rand, combined with lower global prices and declining inflation expectations, supports the country’s inflation outlook and interest rate trajectory. He emphasises that currency stability matters more than further appreciation and expects the rand to be less volatile over time, even if it fluctuates in the medium term as inflation targets adjust. Over the longer term, the currency is likely to depreciate gradually in line with inflation differentials.
