South Africa FX
05 June 2023
FX Monthly Chart Book
Shireen Darmalingam
- The rand is relatively steady following its volatility in recent weeks. It lost 7.1% against the dollar in May, 6.3% against the pound and 4.2% against the euro. The rand weakened to an intraday record high of R19.86/$ in May. Indeed, the rand was volatile in May, trading in a range of R18.17/$ – R19.86/$, and ending May weaker, at R19.77/$ (compared to R18.29/$ at end April); it averaged R19.07/$ in May, compared to an average of R18.25/$ in April. The rand was the worst-performing emerging-market currency in May.
- The rand has in recent weeks borne the brunt of negative sentiment, which resulted in increased investor outflows while keeping inflows limited. The currency has been pressured by a stronger USD and poorer investor sentiment. Concerns about SA’s relationship with Russia amidst the war continues to keep currency gains at bay. Government recently granted diplomatic immunity to attendees of two of the upcoming BRICS meetings. Concerns over China’s recovery is keeping the rand on the back foot.
- The rand has also been impacted by intense loadshedding and the bleak outlook for winter. Markets are cautious regarding any news of increased loadshedding. Eskom recently warned that SA faces a “difficult winter”, with 3,000MW less capacity than last year. Eskom noted a worst-case scenario of having to cut 8,000 MW from the grid (Stage 8 loadshedding) as a possibility. The utility also indicated that it would keep planned maintenance to a minimum and increase diesel burn at open-cycle gas turbines to help keep the lights on this winter. The SARB further noted at its May Monetary Policy Committee (MPC) meeting that further currency weakness would indeed be possible (this is flagged as a risk to its forecast that the rand will recover).
- The rand remains undervalued, and weaker than our fair-value estimate. It will likely remain undervalued in the near term given no obvious catalyst to compress the sizeable risk premium stemming from electricity and geopolitical concerns. We still see the currency as only discounting meaningful loadshedding, sanctions, and fiscal risks but not yet discounting the worst outcomes for those risks. It could therefore very well weaken further if those risks materialise. We see the rand ending this year at R17.50. 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 1.07 currently and 1.31 by the end of 2024. We still expect further volatility over the short term given global financial stability concerns/increased risk aversion and local factors weighing on the rand. As such, the rand is expected to average R18.30/$, R20.10/€ and R23.10/£ in 2023.
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