The South African Rand's "Continuous improvement"

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The South African Rand reached a one-year high on Friday and looks poised for further strength, according to Commerzbank.

The South African Rand reached its strongest level against the U.S Dollar at 17.7 last Friday, with Commerzbank saying there is more to the story than the wholesale selloff of the U.S. Dollar we have seen of late.

Indeed, while USD/ZAR was hitting new highs, the Dollar had been recovering against the bigger exchange rates of GBP/USD and EUR/USD. According to Volkmar Baur, an economist at Commerzbank, the Rand's outperformance has a distinctly local flavour.

Baur says last week's high against the Dollar was thanks to better-than-expected producer prices. "These fell to an annualised rate of 4.2% in July, down from 4.6% in June. On average, analysts were expecting a drop to 4.5%. This is another positive signal for the SARB, which could start cutting interest rates as early as September," he says.

Typically, rising odds of interest rate cuts weigh on a currency. But, oftentimes, it can be supportive, as is the case with ZAR.

"Normally, rate cuts are always associated with a weaker currency. However, the situation in South Africa is somewhat different. The disinflation here is not due to a weakening of demand, but to a structural improvement on the supply side," says Baur.

The analyst notes there have been no power cuts in South Africa for several months, which may not sound very impressive at first, but this has not happened in South Africa for years.

"Disinflation is therefore paving the way for lower interest rates, which could lead to further investment and ongoing structural improvements. This positive development reduces the risk premium that the foreign exchange market has placed on South Africa in recent years and strengthens the Rand," says Baur.