South Africa FX
02 September 2024
FX Monthly Chart Book
Shireen Darmalingam
- The rand gained ground (+2.1%) against the dollar in August due to a combination of local and global factors – from an intraday high of R18.68/$, it ended August stronger at R17.81/$ (compared to R18.19/$ at the end of July). However, it was marginally weaker (-0.1%) against the euro and the pound. It traded in a range of R17.59/$ – R18.68/$ in August. Several other emerging market currencies too gained ground against the dollar in August: the MYR, THB, IDR, PHP and CZK were amongst the best-performing currencies. However, the MXN, RUB, TRY, and COP were amongst the worst performers in August.
- The rand strengthened in August, benefitting from more supportive global sentiment and developments, gaining ground against the dollar following comments by the US Fed Chair Jerome Powell of interest rate cuts being imminent in the US. Powell commented at the annual Jackson Hole economic symposium that the time had come to cut the Fed funds rate. Powell added that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks”. The chair also noted his confidence as having grown about inflation being on a sustainable path back to the US inflation target. Several other policymakers concurred with the US Fed Chair Jerome Powell about rate cuts being imminent. Policymakers expressed cautious optimism, while aware of the risks that rate cuts may bring. Several central banks have indicated fears that growth would need to be sacrificed to reach their respective inflation goals. The focus will now be on pacing interest rate cuts correctly and avoiding recession. The Fed is largely expected to begin its rate cutting cycle at the 18 September FOMC meeting.
- The rand was further supported by positive sentiment around the formation of the Government of National Unity (GNU) and hopes for crucial reforms. The suspension of loadshedding also contributed to a more favourable economic outlook. Eskom recently released its Summer plan at the end of August, with the Group CEO noting that he anticipated that SA would experience a “loadshedding free summer” this year. In a worse-case scenario, Eskom noted that we could see loadshedding up to Stage 2, at the most. In addition, Eskom’s focus going ahead is to control unplanned losses to ensure a comfortable summer without loadshedding. Eskom is also confident that more generation capacity is expected to come online from power stations in the coming months, further easing the pressure on the grid.
- The SARB noted potential upward revisions to growth forecasts as well as better control over inflation. Indeed, CPI moderated more than expected in July to a three-year low, encouraging expectations for interest rate cuts. We maintain our long-standing view that the SARB will begin cutting rates at the September MPC meeting.
- Our forecasts have always assumed ongoing traction with, and a positive impact from, policy reforms, and we have therefore generally already been more constructive than the consensus. For 2024, we forecast the rand to average R18.30/$, R19.90/€, and R23.40/£ (see our forecast summary in the attached report); however, on a trade-weighted basis, currency gains will likely remain limited. The rand is currently weaker than our fair value estimate of around R17.20-R17.90/$, although we expect it to end this year stronger.
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