Volatile rand may extend rally in 2017
Despite the local currency’s roller-coaster moves in the past year, many analysts believe it could appreciate beyond R13 to the US dollar in the coming months.
therand’s hefty gains over the past few months have confounded many and proved once again that the South African currency is one of the world’s most volatile – and unpredictable.
It appreciated by 12.5% against the dollar in 2016, making it the best-performing emerging-market currency after the Brazilian real and Russian rouble, according to a basket of 24 currencies monitored by Bloomberg.
The gains were impressive given the sharp swings in the unit triggered by domestic politics, and because it began 2016 not far off a record low of R17.91 to the dollar, hit in the turmoil that followed President Jacob Zuma’s shock dismissal of finance minister Nhlanhla Nene in December 2015.
The rand ended last year at about R13.60 – and according to some analysts could extend its gains to R12.50 this year, and possibly even further. This must be galling for those who predicted the currency would close 2016 at R19 or R20, and demonstrates why so many analysts try to steer clear of forecasting the unit.
“Things look favourable at the moment – the likelihood is that we will see the rand strengthen over the next weeks and months,” says Econometrix Treasury Management market analyst Ricardo da Camara. “We think it is possible the rand will finish the year at R12.50/$ – that would be closer to its fair value.”
Da Camara is not alone. RMB currency analyst John Cairns also sees the rand appreciating this year and points out that if its history of “blowouts” is anything to go by, the currency could strengthen below R10/$ – though he believes that this outcome is unlikely.
Technical analysts say the key level to watch is R13.50 to the dollar, which is where the currency is hovering around right now. If that is broken decisively, it would signal a decisive breach of a five-year trendline that has been in place since the currency began a steady descent in 2011. Rand forecasts widely scattered However, rand forecasts have not been so scattered for at least a decade. Bloomberg’s latest compilation of estimates from financial institutions show year-end forecasts for 2017 ranging between R12.80/$ and R15.75/$.
So far, the bears have it, as the median of those forecasts sit at R14.60.
There are several reasons for the currency’s recovery last year. Commodity prices have begun to improve, boosting the value of South Africa’s export earnings, and a pickup in global growth makes it likely that the trend will be sustained in 2017.
The slowdown in China’s economy appears to have stabilised, and global financial markets are taking the gradual US interest rate hiking cycle in their stride. Normally higher US interest rates prompt an outflow of capital from emergingmarket assets because the higher yield they offer is no longer as attractive to foreign investors, in the context of the greater risk involved.
When business mogul Donald Trump was elected president in November, emerging markets were knocked by perceptions that his promised tax cuts and ambitious infrastructure spending programme would spur US growth more than anticipated, boosting the extent and pace of interest rate increases.
But Trump’s first news conference this year helped to dispel those concerns, as few details of his plans were revealed. And a slow pace of US interest rate increases will curb gains in the dollar, which normally puts emerging-market currencies and assets on the back foot.
“We believe a continuation of dollar strength, provided it occurs gradually, poses a lesser risk to emerging-market currencies than it did between 2013 and 2015, as the macroeconomic fundamentals of most emerging-market countries are in much better shape today,” Lazard Asset Management said in a recent research report. Support from the current account In SA, the rand is also being supported by the narrowing deficit on its current account, the country’s broadest measure of trade in goods and services. The shortfall is seen as the Achilles heel of the rand as it has to be covered by foreign purchases of domestic bonds and equities – which are often volatile and short term.
In its mid-term budget update in October, the Treasury predicted that the country’s current account deficit would narrow to 3.8% of GDP in both 2018 and 2019, after shrinking to 3.9% from 4.3% in 2015. That was already its lowest level since 2011.
In the first 12 days of this year, emerging markets have attracted net equity and debt inflows to the tune of $1.2bn. Although it underperformed the trend, SA’s assets look
The rand ended last year at about R13.60 – and according to some analysts could extend its gains to R12.50 this year, and possibly even further.
Kit Juckes Global strategist at Société Générale