South African rand rallies amid U.S. inflation data and monetary policy shifts

The South African rand has experienced a significant rally Tuesday, driven by a combination of US inflation data and shifts in global monetary policy. The currency surged over 2% to R18.22/$ amid a weakening dollar, as the latest US inflation figures suggested a potential pause in interest rate hikes by the Federal Reserve.

The positive momentum for the rand continued into Wednesday, with an additional gain of 0.4%, marking a total increase of 3.1% over two sessions. This marks the rand’s largest two-day advance against the dollar since July. The following factors have contributed to this trend:

• Decreased volatility, with three-month implied volatility nearing a two-year low.
• Lower costs for hedging against rand declines, with one-month risk reversals at a six-month low.
• Strong demand at Tuesday’s government bond auction, the most robust since July 2021.
• The rand’s attractiveness for carry trade investors, thanks to lower volatility and high yields compared to other emerging markets.

Moreover, this quarter’s inflows into South Africa have reached 17.5 billion rand ($965 million). The Bloomberg EM Local Currency South Africa Bond Index saw its most significant daily gain in four months on Tuesday and is currently trading near its highest level since July.

This rally coincides with newly released economic data from South Africa indicating a decrease in Q3 unemployment to 31.9%. The combination of favorable local economic data and international market dynamics has bolstered investor confidence in the South African currency.

The dollar-rand carry trade has returned 4.7% this quarter, a notable recovery after an 8.2% loss in the first nine months of the year.

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