South African Rand Could Rally 5% Or More if Energy Plan Pans Out - RBC 

"By our estimates, the pair would have space to sell off by almost 5%" - RBC Capital Markets

Soweto towers. Image © Adobe Images

The South African Rand was an underperformer among comparable currencies in the week to Friday but could rally by five percent or more if a recently announced plan to fill the national energy supply deficit pans out in the months ahead, according to RBC Capital Markets. 

South Africa's currency fell widely on Friday when the Polish Zloty and Swedish Krona featured as the only other top currencies to give up more ground while the Rand softened almost across the board for the week overall when the Russian Rouble was the only other G20 currency to fall further. 

The Rand has been underperformer throughout the opening weeks of the fledgling year and Thusday's State of the Nation (SONA) address from President Cyril Ramaphosa did little to change it, although some analysts say it contained what could ultimately be the seeds of recovery. 

"If South Africa’s government is able to regain the market’s confidence that it can successfully tackle the energy crisis, then USD/ZAR would have space to unwind its recent risk premium. By our estimates, the pair would have space to sell off by almost 5%," writes Daria Parkhomenko, a strategist at RBC Capital Markets, in a Friday review of the outlook for USD/ZAR. 

Above: USD/ZAR shown at daily intervals alongside GBP/ZAR. Click image for closer inspection. 

"That would equate to ~16.90/95 from current spot levels (~17.80). If the crisis worsens (a scenario that cannot be ruled out), the market will have to carry an even larger risk premium. A more severe deterioration would likely see USD/ZAR test the triple top at ~18.50, with all else equal," she adds.

Parkhomenko and colleagues said on Friday that 16.71 to 17.81 is their assumed trading range for USD/ZAR and that analysis of the Rand's sensitivity to changes in the Bloomberg Dollar Index suggests it should have fallen by an additional five percent since early November. 

That estimate is derived by benchmarking USD/ZAR to USD/MXN and measuring each according to its typical 'beta' sensitivity to a Bloomberg U.S. Dollar Index that fell heavily between early November and last week.

"The SONA was comprehensive and positive in its messaging but did not inspire markets, who take a wait and see approach to delivery," says Annabel Bishop, chief economist at Investec, in reference to Thursday's SONA address.

"But after over a decade of costly expenditure on electricity and a poor-quality result, markets fear additional cost and debt for the state and a deterioration of state finances, negatively impacting SA’s bond market and so weakening the rand," she writes in a Friday review of the SONA. 

Above: USD/ZAR shown at weekly intervals alongside GBP/ZAR. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Both Bishop and RBC's Parkhomenko say the Rand's Friday underperformance likely reflects market scepticism over whether measures announced in Thursday's SONA will be succesful in providing South Africa with sufficient electricity to enable this year's rolling power cuts to be circumvented. 

Rolling power cuts have been a daily occurence thus far in 2023 owing to equipment failures and other troubles at South Africa's ailing state energy monopoly Eskom, which led President Cyril Ramaphosa to declare a state of national disaster on Thursday. 

A new dedicated energy czar is in the process of being appointed to oversee in the next six months the procurement of as much as 6,000MW of emergency power per day and to manage earlier streams of work involving the production of permanent generating capacity and a financial restructuing of Eskom itself.

"But the process is no easy feat, especially given the different views among the various stakeholders and prior delays in bringing online new capacity. This is where the expected upcoming Cabinet reshuffle will be key to watch as a signal on policy direction," RBC's Parkhomenko says.