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.

Finweek English Edition - - THE WEEK - By Mariam Isa

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

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