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South Africa FX 05 May 2023

FX Monthly Chart Book

Shireen Darmalingam

  • The rand weakened against the major currencies in April. It was 2.6% weaker against the dollar, 3.7% weaker against the euro, and 3.9% weaker against the pound. The rand was volatile in April, trading in a range of R17.75/$ – R18.53/$, and ending the month weaker, at R18.29/$ (compared to R17.79/$ at end March); it averaged R18.25/$ in April compared to an average of R18.18/$ in March. The rand was also amongst the worst performing emerging market currencies in April, with only the Argentinian peso performing worse than the rand.
  • The rand continued to take its cue from global developments; it gained some ground mid-April on expectations that the Federal Reserve was likely to signal a pause at its May FOMC meeting. These gains were short-lived as the local developments weighed on upside gains in the currency. Loadshedding has intensified in April with Eskom implementing higher stages of loadshedding more frequently. The SARB noted in its recent Monetary Policy Review, released last week, that power cuts will likely add 0.5 percentage points to the inflation rate as businesses pass on the costs of back-up energy solutions to consumers. While we see loadshedding becoming less of a constraint next year, a particularly harsh winter in terms of loadshedding could limit upside gains in the currency in the next few months. Flare-ups in political uncertainty in SA in the lead-up to the elections in 2024, as well as severe loadshedding, the weakening terms of trade, high interests as well as weak global economic growth continue to weigh on the rand. Our G10 Strategist Steve Barrow does not expect the repercussions of the recent global banking turmoil to translate into more intense global financial stress with a relatively shallow global downturn expected.
  • We remain relatively constructive about the outlook for the rand, which depends to a large extent on the trajectory of SA’s terms of trade. We expect the terms of trade to trend sideways or partially recover from its recent softness. The rand is still undervalued, and weaker than our fair-value estimate. We see the rand ending this year at R16.90/$. This is premised on dollar weakness later in the year, as expected by our G10 strategist. The EURUSD is expected to end the year at 1.18 from 1.10 currently and 1.31 by the end of 2024. We continue to expect further volatility over the short-term given global financial stability concerns/increased risk aversion. As such, the rand is expected to average R17.73/$, R19.50/€ and R22.34/£ in 2023.

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