South Africa FX
11 June 2024
FX Monthly Chart Book
Shireen Darmalingam
- The rand gained ground, albeit only slightly, against the dollar in May, due to a combination of both local and global factors – from an intraday high of R18.89/$, it ended May stronger, at R18.79/$ (compared to R18.80/$ at end April). It was 0.1% stronger against the dollar, 1.5% weaker against the euro, and 1.8% weaker against the pound. It traded in a range of R18.02/$ – R18.89/$ in May. The ZAR was amongst the best performing emerging market currencies in May. The best performers were the CLP, CZK and RUB. The worst performers were the ARS, PHP and BRL.
- 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) will meet on Wednesday to decide on the course of monetary policy for this year. Several policymakers have commented that the Fed still has a while to go to tame inflation. They have indicated that the Fed should take its time in monitoring whether inflation is slowing enough to start cutting interest rates. 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 held its ground despite the announcement that the ANC lost support and its outright majority at a national level at the elections held on 29 May. Focus has now shifted to the possible government of national unity (GNU) that might be formed given that support for the ANC came in just above 40%. President Cyril Ramaphosa and the ANC’s National Executive Committee has announced that it would be inviting other political parties to form a GNU. President Ramaphosa noted that establishing a GNU would be the most viable, effective and powerful way to meet the expectations of all South Africans at this critical juncture. This has provided some indication of the ANC’s current intent. However, the outcome still needs to be decided, and this underpins persistent risk for financial markets and the rand. The rand is currently discounting a moderate risk premia for this political uncertainty, which we still expect to worsen if the ultimate agreement underpins a more populist policy direction, or compress should the ultimate details point to policy continuity. There is thus limited scope for upside gains in the near term until such time that the political situation becomes clearer.
- For 2024, we forecast the rand to average R18.57/$, R20.10/€, and R23.67/£; on a trade-weighted basis, currency gains will likely remain limited. Our forecasts at this stage reflect the increased uncertainty brought about by the political developments, but for now are premised on the assumption of general policy continuity.
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