South Africa’s rand has come under pressure in 2022, with economists at Nedbank projecting a further difficult trading period over the next 12 to 18 months.
In a research note on Monday (5 September), the banking group’s analysis of the market forces at play showed that the underlying global status remains unsupportive of the outlook for the rand and other emerging market currencies.
Local issues have also played a significant role, however, particularly load shedding, while political uncertainty is feeding risk-off behaviour.
Nedbank noted that the rand has been under persistent pressure over the past three months, with the sharpest depreciation occurring against a rampant US dollar, which reigned supreme in global markets, bolstered by the Fed’s aggressive rate hikes and its hawkish rhetoric.
Interest rate differentials between the US and other countries appear to have impacted most on currency movements, the bank said.
“Growing evidence of slower world growth also played a role, reinforcing risk-off sentiment and further strengthening the greenback’s appeal. At the same time, commodity prices receded from June onwards, hurt by evidence of weaker global demand and expectations that the economic slowdown would intensify into next year.”
This eased the market’s worries about potential supply disruptions caused by Russia’s ongoing war on Ukraine. However, with the world economy faltering and so much risk aversion about, most emerging market currencies tumbled, it said.
Domestically, the return of severe load-shedding over June and July reminded investors’ that South Africa’s growth prospects remain poor, seriously constrained by a worsening electricity shortage for which there is no quick fix.
Adding to the negative sentiments locally, the allegations of misconduct against president Ramaphosa’s handling of a theft at his Phala Phala farm in 2020 introduced more uncertainties, compromising his position ahead of the ANC’s elective conference in December, Nedbank said.
“Risk appetite is likely to remain volatile as investors try to anticipate the level and the timing of the peak in US interest rates. At the same time, the evolving global slowdown will keep investors on edge. A global downturn will hurt commodity prices,” the group said.
“Given the many uncertainties, and the shifting landscape, global recession risks remain high, whether through policy mistakes or new geopolitical shocks. Emerging markets are particularly vulnerable to tight global financial conditions, world recession, and falling commodity prices.”
Nedbank said that the odds are likely to remain stacked against the rand for the next year and a half, with the group’s model pointing to a monthly average of R17.14 for September, dropping to around R17.00 by the end of the year.
In 2023, the rand is seen fluctuating between just below R17.00 and R17.62 to the dollar, with the annual average expected to be slightly higher at R17.15.
The near-term reprieve is seen as a slight “correction” in the markets as the initial questions about global inflation, the impact of Russia’s war on Ukraine and the pace of US interest rate hikes have largely been answered and should by now be captured in the US dollar’s long run, Nedbank said.
However, the bank said it expects the rand to remain extremely volatile, seesawing with global risk appetites.
“We still see the rand ending the year at firmer levels than is currently the case. Given the global context, the risk to our forecast remains tilted to the downside,” it said.
According to Citadel Global, the rand was caught in the crossfire of a strengthening dollar last week, trading at over R17.00 to the dollar during the week, as Fed Chair, Jerome Powell, suggested that the US Central Bank will keep raising interest rates to tame inflation, bolstering the greenback.
The rand started the new week squarely on the back foot, trading at the following levels:
- ZAR/USD: R17.30
- ZAR/EUR: R17.17
- ZAR/GBP: R19.91
Read: South Africa has more than load shedding to worry about: economists
