South Africa's rand, waiting for growth
July 4 (Reuters) -Investors have cautiously greeted South Africa's new government and despite volatility following the May 29 election there are signs that the rand could enter a phase of stability or even rally if growth and inflation trends become more favourable.
The currency will remain at risk to external factors and uncertainty surrounding the newly formed South African government of national unity (GNU) will impact investor sentiment. The rand is maintaining a yield advantage over the dollar but until the Federal Reserve starts cutting rates, emerging markets will remain on the back foot.
South African inflation looks set to average around 5.0% this year but is expected to edge towards the Reserve Bank's 4.5% target range mid-point during the second half of the year. With inflation tamed the domestic focus will switch to growth. The GNU is now under the spotlight and investors are waiting to see what measures the new administration take to speed up economic growth.
Weak South African growth has been a long-standing concern for investors and rating agencies, impacting tax revenue, and reducing the strength of state finances.
The rand's outlook now depends heavily on improved domestic growth and the removal of structural constraints along with the first cut in U.S. interest rates.
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USD/ZAR daily candle chart: https://tmsnrt.rs/4crpGi9
(Peter Stoneham is a Reuters market analyst. The views expressed are his own)
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