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South Africa FX 07 July 2023

FX Monthly Chart Book

Shireen Darmalingam

  • In the wake of its volatility of recent weeks, the rand has weakened recently on fresh concerns that US interest rates may stay higher for longer. The rand gained 4.1% against the dollar in June, 2.7% against the pound, and 2.7% against the euro. It also strengthened to an intraday low of R18.12/$ in June. It was, however, volatile, trading in range of R18.12/$ – R19.92/$, albeit starting June stronger, at R18.84/$ (compared to R19.77/$ at end May). The rand averaged R18.75/$ in June, compared to an average of R19.00/$ in May. The rand was amongst the top-performing emerging-market currencies in June, only behind the COP and BRL.
  • The rand’s strength in June was supported by economic data confirming that the SA economy had avoided a recession. The currency was further supported by a weaker dollar, lower stages of loadshedding, better-than-expected economic data, and easing geopolitical tensions (which had shaken the markets towards end May).
  • The rand reached our fair value estimated range in June, which we saw as potentially stretched, as the prevailing risks, around Russia and electricity in particular, still justify a risk premium. We remain slightly constructive about the prospects for the rand towards end 2023/early-2024. We see the rand ending this year at R17.80/$ due to dollar weakness later in the year forecast by our G10 strategist. The EURUSD is expected to end the year at 1.15, from 1.08 currently and 1.31 by end 2024.
  • Short-term volatility is still likely; we foresee neither any imminent resolution of the major risks, nor any catalysts for any material improvement in the fundamentals. Global growth concerns, as well as idiosyncratic factors, may continue weighing on the rand. We expect the rand to average R18.30/$, R20.10/€ and R23.10/£ in 2023. In the medium term, though, the expected improvement in the electricity shortfall as well as more supportive global economy should underpin both an improvement in general economic growth expectations as well as a compression of (the related portion of) the risk premium currently being discounted.

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