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South Africa FX 03 March 2023

FX Monthly Chart Book

Shireen Darmalingam

  • The negative impact of loadshedding, declining commodity prices, likely softer global growth this year, as well as several idiosyncratic factors and global headwinds kept the rand under significant pressure in February. It lost ground against the majors in February; it was 6.8% weaker against the dollar, 4.1% weaker against the euro, and 5.7% weaker against the pound. The rand was particularly volatile in February, trading in a range of R17.04/$ – R18.52/$, and ending the month weaker, at R18.33/$ (compared to R17.43/$ at end January); it averaged R17.91/$ in February.
  • While global factors have weighed on the rand, severe loadshedding and SA’s weaker terms of trade have played more of a role in its recent underperformance, and more so than SA’s recent grey-listing by the Financial Action Task Force (FATF) at the end of February. The more frequent bouts of higher stages of loadshedding in February too weighed on the rand. Uncertainty around electricity supply continues to threaten economic activity. Rolling blackouts continue despite the announcement of energy reforms to eliminate outages. The rand has also been under significant pressure due to declining prices for key export commodity, which, in rand terms, are on balance weaker. The rand also weakened more against the dollar in February than on a trade-weighted basis. Our fair-value models have changed significantly due to weaker commodity prices, now implying the rand as discounting a moderate risk premium.
  • The rand weakened slightly at the end of February after SA’s FATF grey-listing (which covers countries that fall short in tackling illicit financial flows). SA is considered not fully compliant with anti-money laundering and terrorist financing standards; there are eight remaining points for SA to work on, per FATF guidance.
  • The rand is undervalued, and weaker than our fair-value estimate. We see the rand ending this year at R16.50/$, and averaging R17.11/$, premised on the dollar weakness forecast by our G10 strategist, Steve Barrow. It is expected to average R18.95/€ and R21.09/£ in 2023. Weaker-than-expected terms of trade and/or global growth, flare-ups in political uncertainty domestically as well as increasingly frequent bouts of high stages of loadshedding could pose downside risks to our forecasts.

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