South Africa FX
07 August 2024
FX Monthly Chart Book
Shireen Darmalingam
- The rand lost ground against the majors in July due to a combination of local and global factors – from an intraday high of R18.65/$, it ended July largely unchanged, at R18.19/$ (compared to R18.19/$ at the end of June). It was 0.9% weaker against the euro, and 1.5% weaker against the pound. It traded in a range of R17.94/$ – R18.65/$ in July. Several other emerging market currencies lost ground against the dollar in July: the ARS, MXN, TWD, TRY, and BRL were amongst the worst-performing currencies. The PEN, THB, MYR, COP and PLN were amongst the stronger performers in July.
- The rand continues to take its cue from global developments, particularly around developed market central bank decisions and election uncertainty in the US. Recent data out of the US has shown that the labour market is softening, which comes at a time when the Fed is considering cutting the Fed funds rate. The weaker-than-expected labour market data has opened the door to the possibility of a 50 bps interest rate cut at the September FOMC meeting. Our G10 Strategist, Steven Barrow, however, expects the Fed to stick to a 25 bps cut when meeting next month. Several Fed policymakers have indicated a rate cut as imminent. Talk has surfaced of 100 bps worth of interest rate cuts by the Fed this year. We expect the dollar to weaken once the Fed starts to cut rates. Interest rate moves will, however, be dependent on incoming growth and inflation data in the lead-up to the meeting. Concerns about the possibility of a US recession limited any upside to the local currency in July, with risk-off sentiment rippling through financial markets.
- The domestic downside risks to the rand fell in July as sentiment around the formation of the government of national unity (GNU) and its likely path of policy continuity lifted sentiment. President Cyril Ramaphosa announced in his State of the Nation address (SONA) that the GNU had agreed to focus on three strategic areas: inclusive economic growth and job creation; reducing poverty; and building a capable and ethical state. President Ramaphosa also highlighted that structural reforms would continue and be broadened; Operation Vulindlela (OV) has been successful in breaking down silos in government to drive the implementation of reforms. However, by month-end, the rand came under renewed pressure as global sentiment weakened towards riskier assets. This came on the back of growing concern that the US could be headed for a recession and causing significant weakness in the rand. However, at this stage we assume that the market jitters will fade (and thus remove some of the latest pressure on the ZAR). We will monitor this closely. Still, 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.
- For 2024, we forecast the rand to average R18.33/$, R19.82/€, and R23.31/£; on a trade-weighted basis, currency gains will likely remain limited. The rand is currently weaker than our fair value estimate of around R17.80/$, although we expect it to end the year stronger.
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