South Africa FX 04 April 2023
FX Monthly Chart Book
- The rand’s performance against the majors was mixed in March; it was 1.9% stronger against the dollar and 0.2% against the euro but was 0.7% weaker against the pound. The rand was quite volatile in March, trading in a wide range of R17.69/$ – R18.71/$, and ending the month stronger, at R17.79/$ (compared to R18.33/$ at end of February); it averaged R18.27/$ in March. The rand was also amongst the top performers amongst emerging market currencies in March.
- Global factors weighed on the rand in March. Global stagflation has given rise to a fair amount of volatility, underpinning caution and increased risk premia/aversion. Relentless domestic power outages at the beginning of the month and SA’s weaker terms of trade too weighed on the rand. However, the currency gained after the SARB’s larger-than-expected interest rate hike in March — and it should benefit further if sentiment improves (if loadshedding becomes less of a concern) and uncertainty eases. There has been an improvement in loadshedding over the past two weeks on the back of an improvement in supply (rather than a reduction in demand). This has been supported by a decline in generating unit breakdowns.
- We remain relatively constructive about the outlook for the rand, though this hinges to a large extent on the trajectory of SA’s terms of trade, which is expected to trend sideways/make a partial recovery from the current low level. The rand is still slightly undervalued, and weaker than our fair-value estimate. We see the rand ending this year at R16.50/$. This is premised on dollar weakness later in the year, as expected by our G10 strategist Steve Barrow. The EURUSD is expected to end the year at 1.18 from 1.09 currently. The rand is expected to average R17.31/$, R18.94/€ and R21.59/£ in 2023. Weaker-than-expected terms of trade and/or global growth, flare-ups in political uncertainty in SA in the lead up to the elections in 2024, as well as increasingly frequent bouts of high stages of loadshedding are still the downside risks to our rand forecasts. Our rand forecasts are premised on our G10 strategist’s relatively sanguine view of the ultimate repercussions for global financial markets of the current banking crisis, which includes a relatively shallow global downturn.