Analysts at Rand Merchant Bank and ING Groep predict the currency, the second-worst performer among emerging markets in the past month, will rebound against the dollar by year-end as the pull of improving fundamentals and the hunt for yield support buyers amid lingering political and fiscal risks.
The rand fell to a six-month low of R13.8618/$ this week as tepid economic growth, an ANC leadership battle and the threat of a widening budget deficit deepen an emerging-market currency sell-off.
That pessimism may be overdone and investors should look through looming risk events, such as the Treasury’s medium-term fiscal update and the ANC’s elective conference, and focus on sources of underlying strength like a narrowing trade gap, according to ETM Analytics.
“We would expect the rand to appreciate in a normal environment,” says Halen Bothma, a market analyst at ETM. “If you erase the risks like the ANC conference and the medium-term budget policy statement, the fundamentals are supportive. We are modestly bullish on the rand.”
The currency has fallen about 7% since touching an almost three-month high on September 6 as traders bought dollars on the expectation that the Federal Reserve will raise rates later this year. The rand has scope to turn that around, according to Rand Merchant Bank strategist John Cairns, who sees it strengthening to R13/$ by year-end.
“Even with recent weakness, the rand is still trading within existing ranges,” he says. “There is still a high number of event risks that could easily see the recent rand moves reverse.”
Analysts agree the currency will recover, with the median forecast in a Bloomberg survey for it to strengthen to R13.28/$ by year-end.
Strategists have raised their rand projections for end-2017 as the South African currency benefited from carry appeal, low inflationary pressures and the country’s longest run of trade surpluses in six years, which has helped to narrow the current account deficit.
“There is a huge amount going on in SA, but the external environment is reasonably benign,” says Chris Turner, global head of strategy at ING.
“We think dollar strength will have run its course by the end of the year and investors will get back to carry. The rand will likely benefit from those flows.”
The road forward is far from clear, though. The ANC’s contest to elect a new party leader, already marred by violence and legal disputes, will culminate in a conference between December 16 and December 20, with the outcome highly uncertain.
Amid hamstrung growth, Finance Minister Malusi Gigaba’s medium-term fiscal statement on October 25 may show a weaker tax outlook. If there is a deterioration in the budget consolidation path, assessments by Moody’s Investors Service and S&P Global Ratings scheduled for November 24 could lead to the country’s local sovereign debt being downgraded to junk.
“All these factors have affected sentiment,” Bothma says. “But the mushrooming trade account and narrowing inflation are all supportive of the rand. The currency could strengthen to a range of between R12.50/$ and R13/$.” – Bloomberg