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South Africa FX 05 October 2023

FX Monthly Chart Book

Shireen Darmalingam

  • The rand kicked off September on the backfoot and lost ground against the dollar due to both local and global factors; it and reached an intraday high of R19.33/$ during the month. It ended September marginally weaker, at R18.92/$ (compared to R18.89/$ as at end August); while it was 0.4% weaker against the dollar, it gained 2.8% against the pound, and 1.5% against the euro. It traded in a volatile range of R18.62/$ – R19.33/$ but was still amongst the better-performing emerging-market currencies in September, outperformed by only the KHD, ARS, PHP, COP and INR.
  • The rand responded to hawkish Fed talk that has kept alive the possibility of further US interest rate increases, which has helped to strengthen the dollar. Several Fed policymakers recently commented that the Fed would not be averse to hiking rates further, following the pause at its September FOMC meeting, should economic conditions warrant it. Fed Chair Jerome Powell remarked that policymakers should proceed carefully on whether to hike again. Many hawkish policymakers noted that additional interest rate hikes might be necessary to tame inflation, as rising energy prices pose a threat to recent progress. The narrative of higher-for-longer (global) interest rates has hurt sentiment, which has been rand-negative.
  • Idiosyncratic factors also weighed on the rand in September. The rand faced a sell-off ahead of the SARB’s MPC meeting in September and the expectation that the central bank might pause its rate hiking cycle and consider cuts next year. Further pressure on SA’s terms of trade during the month was likely also at play, while weak fiscal data reinforced growing concerns about fiscal sustainability. We keep an eye on the Medium-Term Budget Policy Statement to be tabled on 1 November and whether Finance Minister Enoch Godongwana will credibly signal a commitment to fiscal sustainability. Short-term rand volatility is likely to persist as the currency remains sensitive and vulnerable to local shocks and risks.
  • The rand remains undervalued relative to our estimated fair-value range amid concerns about the fragility of the global economy and weak domestic fundamentals. It has weakened on the back of heightened concern about a fragile global economic backdrop. Markets have also grown increasingly concerned about domestic challenges, including fiscal slippage. Pressure on the currency also emanated from persistent electricity concerns despite the improvement in the electricity shortfall over the past few weeks. Eskom acting CEO Caleb Cassim noted last week that Eskom aims for outages not exceeding Stage 4 during the SA summer. The recent improvement in the stages of loadshedding has been welcome. Eskom has ascribed this to the return to service of Kusile’s unit 3, the sustained improved generation performance, and lower-than-anticipated demand for electricity. The utility further noted that it might be adding 2,400 MW of generating capacity to the country’s strained electricity grid before the end of this year. However, entrenched logistical infrastructure shortcomings have been aggravating persistent concerns about weak trend growth, and therefore fiscal sustainability.
  • We expect the rand to average R18.41/$, R20.04/€, and R23.08/£ 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. There is heightened concern among investors about how the current global financial market rout will unfold; this is a major forecast risk for the rand in the near term.

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