South Africa FX
07 May 2024
FX Monthly Chart Book
Shireen Darmalingam
- The rand gained ground against the dollar in April, due to a combination of both local and global factors – from an intraday high of R19.38/$, it ended April stronger, at R18.80/$ (compared to R18.88/$ at end March). It was 0.4% stronger against the dollar, 1.4% against the euro, and 1.3% stronger against the pound. It traded in a range of R18.41/$ – R19.38/$. The ZAR was amongst the best performing emerging market currencies in April, together with the CLP and HKD. The worst performers were the BRL, MXN, PHP and KRW.
- Changes in expectations for the upcoming US Fed rate cutting cycle continue to be a significant driver of currency movements. The Federal Open Market Committee (FOMC) at its policy meeting last week cited the "lack of further progress" towards lowering inflation, despite inflation having decreased over the past year, as the primary reason for holding rates steady. The committee noted that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%. Fed policymakers may now be less confident that inflation is on a path to the central bank’s 2% target following the latest CPI and core PCE data for March. Our G10 Strategist is of the view that the Fed could still cut rates thrice this year and he believes that, once the Fed starts cutting rates, we can expect the dollar to weaken.
- The rand held its ground after a recent poll indicated that, while the ANC might lose support at a national level, the poll suggested that there was no alternative to the governing ANC. The rand outperformed peers recently, albeit remaining weak on a relative basis, underpinned by a slightly more supportive global backdrop alongside a modest compression of the idiosyncratic risk premium. We estimate that the rand is still slightly undervalued, discounting a modest domestic risk premium. However, much depends on the outcome of the national elections scheduled for 29 May. The rand stands to gain further if the election-outcome is deemed to be market-friendly and supportive of policy continuity. Nonetheless, there is limited scope for upside gains unless there is a significant change in global or domestic fundamentals.
- For 2024, we forecast the rand to average R18.50/$, R20.10/€, and R23.61/£; on a trade-weighted basis, currency gains will likely remain limited. This is premised on a general election outcome that supports general policy continuity.
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