South Africa FX
03 July 2024
FX Monthly Chart Book
Shireen Darmalingam
- The rand gained significant ground against the majors in June due to a combination of local and global factors – from an intraday high of R19.00/$, it ended June stronger, at R18.19/$ (compared to R18.79/$ at end May). It was 3.3% stronger against the dollar, 4.6% stronger against the euro, and 4.1% stronger against the pound. It traded in a range of R17.86/$ – R19.00/$ in June. The ZAR was amongst the best performing emerging market currencies in June, second only to the RUB. The KRW, THB and HKD were also amongst the top performers against the dollar. The worst performers were the MXN, COP and BRL.
- The rand continues to take its cue from global developments, particularly around developed market central bank decisions. The US Fed has delayed its interest rate cutting cycle, with the Fed Chair communicating that the central bank has time to assess whether US inflation is headed towards the 2% inflation target. The chair has, however, highlighted that cutting rates too soon may rekindle inflationary pressures. He also noted that, were the Fed to cut interest rates too late, the Fed may damage the economy unnecessarily. While the US economy has remained resilient, the labour market remains particularly strong, which may close the door on Fed rate cuts in the near term. Our G10 strategist believes that the Fed may still cut rates at least twice this year and that, once the Fed starts cutting rates, we can expect the dollar to weaken.
- The rand gained ground on news of an SA government of national unity (GNU) that is likely to ensure policy continuity in the 7th democratic administration. President Cyril Ramaphosa announced the new cabinet of the GNU last week. The portfolios, focused on priority areas for the policy reform agenda, include several improvements and some strong appointments. The president retained Enoch Godongwana as finance minister, ensuring fiscal policy continuity, which was received positively by the market. The DA’s John Steenhuisen has been given the Minister of Agriculture post, with opposition parties getting 12 minister and 10 deputy minister roles in total. The president noted that “the incoming government will prioritize inclusive and sustainable economic growth and the creation of a more just society by tackling poverty and inequality, as well as unemployment”. Even though the political developments have been constructive, any material impact on the economy will likely be protracted and the rand is in no hurry to overreact (investors are also cautious about the persistent constraints to growth and time it will take to lift trend growth). Our forecasts have always assumed ongoing traction with, and a positive impact from, policy reforms, and have therefore generally already been more constructive than the consensus. The rand currently seems to discount a small risk premium while policies under the new GNU are being formulated.
- For 2024, we forecast the rand to average R18.22/$, R19.68/€, and R23.16/£; on a trade-weighted basis, currency gains will likely remain limited. Our forecasts at this stage assume policy continuity.
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