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South Africa FX 07 September 2022

FX Monthly Chart Book

Shireen Darmalingam

  • The rand’s performance against the majors was mixed in August; the rand was 3.8% weaker against the dollar in August and 1.7% weaker against the euro but was 1.6% stronger against the pound. The rand traded in a range of R16.11/$ to R17.14/$ in August and ended the month at R17,11/$ (compared to R16.62/$ at the end of July).
  • The rand will likely remain volatile in September, as has already been the case, and the remainder of the year. It has weakened over the past few days as the energy crisis in Europe intensifies and as global central banks continue to tighten policy. The euro weakened to a 20-year low this week following Russia’s decision to shut a major gas pipeline to Europe intensifying the energy crisis. The G7 leaders have agreed to implement a price cap on Russian oil as the war continues in Ukraine; natural gas prices have surged by over 30% in Europe. EU governments are now also implementing multi-billion euro packages to protect households from soaring energy bills and to alleviate pressure from the crisis. US Fed Chair Jerome Powell signalled last week that the Fed will likely continue hiking policy rates aggressively; the BOE and ECB are also likely to continue on similar paths as these central banks endeavour to tame rising inflation.
  • The rand had initially come under pressure from the Russia-Ukraine war but gained ground after that despite the war intensifying. With monetary policy normalisation extracting liquidity, the rand has again come under increased pressure recently as the energy crisis in Europe intensifies. The global economic outlook and risks have worsened markedly in recent weeks. The rand is weaker than our fair value estimate. Nonetheless, it remains supported by elevated terms of trade this year, albeit fading into H2:22. We see a medium-term recovery in the rand against the dollar, given our G10 strategist’s bearish medium-term dollar projections; our relatively strong rand-dollar forecasts are influenced to a large extent by our bearish dollar views. We see the rand ending the year at R16,50/$ and averaging R16,03/$. The rand is expected to average R16,65/ € and R19,66/£.

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