"The SA yield curve has steepened as rate hikes locally have been priced out. This is also reflected in the FRA curve, where the market is pricing in 70% probability for a final 25bp hike and with easing commencing in 1Q24" - Matrix Fund Managers.

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The Pound to South African Rand exchange rate has risen sharply in recent weeks to establish itself with a tentative toehold above the 22.0 handle but it could also struggle to extend the rally by much beyond its current levels in the immediate period ahead. 

South Africa's Rand softened further on Tuesday when featuring in the lower quadrant of the G20 league table for the session and placing GBP/ZAR on course for a sixth successive intraday gain as the dollar-Rand pair returned toward the three-year low reached in early March. 

Tuesday's falls reflect a continuation of a persistent 2023 underperformance by the Rand, which has been hamstrung by economic concerns and other events rooted in the domestic energy crisis, and came despite a widespread rebound in stock markets and the more growth-sensitive commodities.

"Given that Tuesday is a national holiday in South Africa, we do not expect an EFF shutdown to have a large economic impact, but it may further dent economic sentiment," writes Themistoklos Fiotakis, head of FX research at Barclays, in a Monday research briefing.

"We expect ZAR to continue to trade with larger premium until credible electricity reform is rolled out. Core inflation (Wed) should continue to increase. Consequently, we now expect SARB to hike policy rates by 25bp at its upcoming meeting," Fiotakis and colleagues add.

Above: Pound to Rand exchange rate shown at daily intervals with Fibonacci retracements of February rally indicating possible areas of short-term technical support for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Rolling power cuts resulting from the ailing condition of the electricity-generating equipment of Eskom SOC have increasingly hampered industrial activity and the way of life in South Africa during recent months, leading to a growing sense of gloom in the market about the outlook for the economy.

"The SA yield curve has steepened as rate hikes locally have been priced out. This is also reflected in the FRA curve, where the market is pricing in 70% probability for a final 25bp hike and with easing commencing in 1Q24," says Carmen Nel, an economist and macro strategist at Matrix Fund Managers.

#LoadsheddingUpdate

Due to slight improvement in generation capacity & lower demand loadshedding will remain suspended until 5am on Wednesday. Stage 2 loadshedding will then be implemented. Stage 3 loadshedding will be implemented at 4pm on Wednesday until 5am on Thursday

— Eskom Hld SOC Ltd (@Eskom_SA) March 21, 2023

"This is notably less dovish than what is priced by the Fed Fund futures, and reflects the view that rand risks and sticky local inflation could keep the SARB on hold for longer, despite the persistently weak growth backdrop," she adds in a Friday market commentary.

While plans to repair and replace the Eskom equipment have been agreed by the government, results are unlikely to be achieved quickly or seamlessly, which has left a cloud of risk and uncertainty hanging over the economy and currency in what have been adverse market conditions during recent weeks.

Above: Pound to Rand exchange rate shown at weekly intervals with Fibonacci retracements of 2020 downtrend indicating possible areas of technical resistance for Sterling. Click image for closer inspection. 

Calm had been restored and renewed risk appetite was evident on Tuesday following speculation suggesting the U.S. Treasury Department and other federal agencies are examining ways in which all deposits within the U.S. banking system could be temporarily guaranteed.

This is after the March failure of Silicon Valley Bank and others led to speculation about the prospect of other failures elsewhere in the U.S. and wider world including in Switzerland where the government brokered a merger between the country's two largest banks at the weekend as a result. 

"The turbulence in global financial markets is not at an end, and volatility will most likely persist this year, resulting in risk aversion and so having an underpin of weakness for EM currencies," says Annabel Bishop, chief economist at Investec, in a Friday research briefing.

"For commodity currencies, much will depend on the strength of demand from China coming this year, as well as other factors impacting risk sentiment, with the systemic risk from the banking crisis likely to ease over H1.23 as liquidity is pumped in the sector," she adds.

The Rand and other currencies would likely be susceptible to anything that upsets that newfound calm up ahead but will also be sensitive to the outcome and implications of local inflation figures released on Wednesday and the Federal Reserve (Fed) interest rate decision out later in the session.

Above: Pound to Rand exchange rate shown at monthly intervals with Fibonacci retracements of 2016 and 2020 downtrends indicating possible areas of technical resistance for Sterling. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

"The South African Reserve Bank (SARB) hiked its policy rate by 25bps to 7.25% in January," says Tilman Kolb, an analyst at UBS Global Wealth Management, who tips USD/ZAR to end the quarter down near 17.2 before falling back to 16.2 over the balance of the year.

"This may have been the last hike, though a 6% weaker ZAR compared to when the SARB last met may argue for another hike out of caution. Compared to other emerging market currencies, the rand exhibits a lower carry pickup versus the US dollar," Kolb and colleagues write in a March forecast review.

The consensus sees South Africa's annual inflation rate remaining unchanged at 6.9% for the month of February this Wednesday while the more important core inflation rate is seen edging higher from 4.9% to 5% in an outcome that has ambiguous implications for local interest rate policy.

The South African Reserve Bank (SARB) downgraded forecasts for the local economy and lifted its cash rate by less than many forecasters were anticipating back in January when the bank's latest projections suggested it already expected the core inflation rate to rise to 5.1% this quarter.

South Africa's central bank raised its cash rate to 7.25% in January while the accompanying forecast set suggested that could be as high as it is likely to be lifted before eventually being cut next year, when inflation is expected to fallen back to the middle of the three-to-six percent target band.

Above: South African Reserve Bank forecasts from January 2023. Source: SARB. To optimise the timing of international payments you could consider setting a free FX rate alert here.