After a dramatic year politically and fiscally, the rand has clawed back to levels last seen before the dismissal of Pravin Gordhan as finance minister in March, rising this week to be among the best performing emerging-market currencies worldwide.
The currency surged to R12.26/$ by early Thursday, its strongest level in two-and-a-half years, on positive sentiment sparked by the election of Cyril Ramaphosa as ANC president and expectations that under his stewardship economic conditions may improve.
Out of the basket of 24 currencies tracked by a Bloomberg index, the rand ranked sixth this week, behind four Eastern European currencies and the Korean won.
Azar Jammine, chief economist at Econometrix, said that looking at the rand's performance on a trade-weighted basis over the past 30 years, the current rates marked a return to "more normal" levels.
"In other words it overshot enormously on the downside in 2015 and has just come back to a more normal level now."
The value of the rand on a real trade-weighted basis is the average value of the rand against the currencies of South Africa's 20 leading trading partners, weighted according to the value of trade conducted with each and adjusted for inflation differences."It gives you a feel for the so-called purchasing power of the rand in other countries," Jammine said.
He said history had shown that the rand was prone to overshoot on both the upside and downside. For example, after the firing of Nhlanhla Nene as finance minister on December 9 2015 the rand began a dive that took it to about R17.91/$ the following month.
"The currency tends to overshoot terribly in one direction and then pulls back to what one might call a more normal level."
Alvin Chawasema, a fixed-income trader at Sasfin Securities, said the market had reacted positively to the ANC's elective conference, where Ramaphosa triumphed over President Jacob Zuma's preferred successor, Nkosazana Dlamini-Zuma.
He noted that ahead of the conference the rand was at R13.48/$ but had strengthened to R12.71 by the time it ended.
"What we are seeing now is that we are pricing out some of the political risks, but some of the budgetary concerns still remain," Chawasema said.
"Come the budget, if there is a disappointment, we may see weakness in the rand and bonds; and the converse is also true if we get an improvement in the plans going forward."
But political risk will continue to be a factor as markets wait for the state of the nation address in February and the first meeting of the ANC's new national executive committee.The 2018 budget could also have a negative impact in the market when the full impact of the projected revenue shortfall is unveiled, while further weakness in fiscal metrics could lead to more credit rating downgrades.
The rand is benefiting from improved liquidity in the global financial environment, where investors are seeking higher-yield, riskier assets as opposed to bonds.
"The environment right now is indeed conducive to strength in the rand," Jammine said, unlike in 2015 when a slowing global economy and a sharp drop in commodity prices helped to spark fears of a liquidity squeeze by the US and other major economies.
The current environment, although better, remained volatile, Jammine said.
"If something happened internationally that suddenly caused a scare and the US and other stock markets were to fall 10% or 20%, you'd see the rand back at R14 in next to no time," he said.
"I would suggest that at this moment [the rand] is heavily overbought. I think it would be a brave person who called it still higher."
Thin trading volumes due to the December holidays can often result in wild swings, and in the next few weeks the rand could weaken slightly as commercial activity resumes - especially if many importers rush to take advantage of the exchange rate.
"As a result I wouldn't be at all surprised to see the rand coming back to R13 or more to the dollar," said Jammine.
One of the key factors in rand strength this year was dollar weakness and euro strength.
The dollar opened 2017 with high hopes thanks to the market's confidence that tax cuts and infrastructure spending promised by President Donald Trump would propel the US economy to new heights, but that expectation has soured. Heading into 2018 it remains unclear whether the dollar will see a resurgence.
The strong euro has historically benefited East European currencies, according to Juan Navarro-Staicos, an emerging-markets economist at US investment manager Lord Abbett.
Navarro-Staicos said the "normalisation" of interest rates by the European Central Bank was an important risk for emerging markets.
"For 2018, I'm optimistic that the robust picture will improve in Europe with the sharp fiscal consolidation behind us and many countries starting to see the benefits of their structural reforms," he said.
This could prompt the ECB to increase rates. "The European interest rate market should then normalise," he said.
This would give the euro momentum, which might not bode well for the dollar...