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South Africa FX 13 March 2024

FX Monthly Chart Book

Shireen Darmalingam

  • The rand lost ground against the dollar in February, again due to a combination of both local and global factors – from an intraday low of R18.5/$, it ended February weaker, at R19.21/$ (compared to R18.66/$ as at end January). It was 3.2% weaker against the dollar, and 2.5% against the euro at the end of February, and 2.3% weaker against the pound. It traded in a range of R18.55/$ – R19.34/$. Most emerging-market currencies lost ground against the dollar in February. The worst performers were the CLP, HUF, TRY, and CZK, together with the ZAR.
  • Though the rand reacted positively to the 2024 Budget tabled in February, gains were short-lived. Finance Minister Enoch Godongwana announced that the government would draw down R150bn from the gold and foreign exchange contingency reserve account (GFECRA) at the SARB over the next three years to reduce government’s borrowing requirement. However, only guiding principles on the usage of the GFECRA were provided at this stage, with (only) an undertaking that it would eventually be “formalised through legislation”. The initial reaction from financial markets to better-than-expected fiscal and funding metrics faded as investors remain concerned about persistent risks (to both the near-term and medium-term spending and revenue forecasts). The rand’s weakness towards the end of February came on the back of concerns about policy direction, which was exacerbated by the potential impact that the pending national election result could have on growth reform and fiscal consolidation in particular. Furthermore, the weak commodity backdrop is unsupportive as well as a key risk to our relatively constructive currency forecasts.
  • The rand was also adversely affected by the message that the US Fed is in no hurry to embark on an interest rate cutting cycle. Several policymakers have noted that it would be advisable for the Fed to exercise patience before trimming rates. This stance has supported the dollar. Our G10 strategist, however, believes that, once the Fed indicates when the rate cutting cycle is likely to begin, we can expect the dollar to weaken.
  • We see a compression of the risk premium discounted by the rand exchange rate later this year, which should see the rand ending the year on a firmer footing. Should the local elections (29 May 2024) yield a benign outcome that supports policy continuity, as we expect, it could result in some modest gains for the rand on a trade-weighted basis.
  • For 2024, we forecast the rand to average R18.60/$, R20.21/€, and R23.70/£; on a trade-weighted basis, currency gains will likely remain limited.

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