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South Africa FX 07 September 2023

FX Monthly Chart Book

Shireen Darmalingam

  • The rand lost ground in August due to both local and global factors and reached an intraday high of R19.29/$ during the month. It ended August weaker, at R18.89/$ (compared to R17.82/$ as at end July); it was 3.0% weaker against the dollar, 2.2% against the pound, and 1.8% against the euro. However, it was particularly volatile, trading in a range of R17.82/$ – R19.29/$. The rand was amongst the worst-performing emerging-market currencies in August, outperformed by ARS, RUB, COP, BRL and PHP.
  • The rand in August depreciated to its weakest in two months partly on deepening concerns regarding China’s economic recovery which has weighed on commodity prices. The People’s Bank of China (PBOC) unexpectedly cut its one-year medium-term lending facility rate by 15 bps, to 2.50% in August; this after cutting in June to boost its economy. This comes as a sign that the central bank recognizes the urgency to support the economy, which has deteriorated in recent weeks. The slump in the property market is also taking a toll on the financial sector, calling for quick policy support.
  • In addition to global growth concerns, idiosyncratic factors also weigh on the rand. Short-term volatility is likely to persist as the currency remains sensitive to global news and sentiment as well as vulnerable to local shocks and risks. The rand is now undervalued relative to our estimated fair value range amid concerns about the strength of the global economy and weak domestic fundamentals. This includes persistent electricity concerns, with the recent increase to higher stages of loadshedding likely to continue weighing on the local unit despite reassurances from Eskom that the higher stages won’t persist. Electricity and logistical infrastructure shortcomings are aggravating persistent concerns about weak trend growth, and in turn fiscal sustainability. This is likely a key reason for the rand’s latest underperformance relative to peers notwithstanding relief about above-consensus economic growth data recently released for 2Q23.
  • The rand could recover towards R18.20/$ by the end of the year should the dollar weaken as forecast by our G10 strategist. The EURUSD is expected to end the year at 1.12, from 1.07 currently, and to reach 1.31 by end 2024. We expect the rand to average R18.33/$, R19.95/€, and R23.00/£ in 2023. In the medium term, the expected improvement in SA’s electricity shortfall, as well as a more supportive global economy, should impel improved economic growth expectations. Still, on a trade-weighted basis, currency gains are expected to remain limited.

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