BUSINESS NEWS - The rand has strengthened over the past month, moving from close to R19 to the USD to closer to R18. Some commentators have attributed this recent strengthening to the Government of National Unity (GNU).

When assessing the rand, it's essential to compare its movements with those of other currencies to identify the driving forces accurately.

For example, if all currencies strengthened against the USD this past month, we can't necessarily attribute the rand strength to the GNU.

Well, chart one shows the Euro also strengthening against the dollar.

So, it's not just the rand strengthening; it's all currencies strengthening against the dollar.

Recent inflation numbers coming out of the US were lower than expected, and thus the US Fed is expected to cut rates sooner. If the US cuts rates, it leads investors to seek higher yields elsewhere, which decreases demand for the dollar.

CHART 1

This doesn't mean the GNU hasn't had an impact.

Just that all currencies have strengthened against the dollar, not just our own.

But how can we strip out international factors?

One way is to look at South Africa's bond yield curve. To understand if our yield curve is influenced more by local events (like the GNU) or international factors (like US rate cycles), we can compare it with the US 10-year yield curve.

Chart 2 illustrates the yield on the US and South African 10 year bonds over the past year.

CHART 2

See how the yield curves move in tandem up until about June this year? That's because they are driven by the same international factors.

But look what happens in June - while both decline (due to the rate cut expectations in the US), the South African yield curve (blue line) drops significantly more than the US curve (green line).

This suggests that the GNU coincides with a larger drop in yield, indicating that the international community perceives us as less risky due to the new government. However, while the GNU has clearly had an impact on the rand's strength, it is not as much as some commentators would have you believe.

It is still too early to draw any concrete conclusions about the effectiveness and efficiency of the GNU, and the market is telling us this.

So, what does this mean for our economy and the Garden Route in particular? While a stronger rand will make South Africa slightly more expensive for foreign tourists, the rand remains significantly undervalued. Even if it strengthens to closer to R16 to the USD, South Africa is still cheap compared with countries like Europe and the US.

Here’s another chart showing the Mexican Peso against the USD for the same period - same trend.

The increased perceived political stability brought by the GNU will enhance South Africa's appeal as a tourist destination, encouraging more foreign visitors and investors. This is particularly beneficial for regions like the Garden Route, which rely heavily on tourism.

Matthew Matthee has a wealth management business in Knysna that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology.

He holds a masters degree in economics from Stellenbosch University and a post-graduate diploma in financial planning from UFS.

He can be contacted on matthewm@gravitonwm.com or check out his website, mattfinancial.co.za.

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