South Africa’s rand is undervalued for now

 ·19 Jul 2022

Andre Cilliers, a currency strategist at TreasuryONE, says that despite a weakening of the rand in recent sessions, it still remains undervalued.

His comment is in line with analysts at both Absa and Nedbank – the former saying that it believes the rand is currently undervalued, given that the current account is set to remain in surplus this year.

Nedbank analysts meanwhile, said in a note in May that South Africa’s currency weakness can extend to around R18.00 against the dollar. “Even though it is trading above our fair-value range, cyclically, we prefer to maintain a weakening bias.”

And the Big Mac Index published by The Economist, shows how the rand continues to be one of the most undervalued currencies globally, relative to the US dollar.


The rand breached R17.00 against the dollar earlier this month, and has threatened to weaken further in recent sessions. The local unit is likely to take further direction from the outcome of the South African Reserve Bank MPC rate decision on Thursday (21 July).

In mid-day trade on Tuesday, it traded at the following levels against the major currencies:

  • Dollar/Rand: R17.02  (-0.13%)
  • Pound/Rand: R20.44  (0.89%)
  • Euro/Rand: R17.42  (1.22%)

Bloomberg reported that South Africa’s central bank will continue tightening monetary policy aggressively amid a deteriorating inflation outlook, currency weakness and pressure to keep pace with an increasingly hawkish Fed.

After breaching the ceiling of the Reserve Bank’s target range for the first time in more than five years, inflation is set to accelerate to levels last seen during the global financial crisis that sent the rand into a tailspin.

While the MPC prefers to anchor inflation expectations close to 4.5%, heightened risks to economic growth – including flood damage in the province that’s the second-biggest contributor to gross domestic product and deeper, more frequent rolling blackouts – will also influence decision-making.

Different data points that support cases for dovish and hawkish stances mean “there’ll likely be a diversity of views on the MPC and therefore there’s room for surprises,” said Peter Worthington, a senior economist at Absa Bank. It may also mark the fifth straight meeting with split votes among the five-member panel.

Of 20 economists in a Bloomberg survey, 13 including Worthington predict a second consecutive half-point increase, with the rest expecting a bigger 75 basis-point hike. Investors have fully priced in a half-percentage point move, but see a chance of a bigger increase.

International Monetary Fund data shows that the main driver behind rand movement relates to global factors and macro-economic events in the US.

The rand is one of the more liquid currencies among emerging markets and as investors flock to safe-haven assets, the rand acts as a proxy for all assets perceived to be risky by global investors. This can often lead to the rand depreciating, analysts at Morningstar Investment point out.

Cilliers said that South Africa is slightly ahead of the curve when it comes to interest rates, having initiated hikes before many countries including the US. He said that the chances of many countries going into a recession remain quite high, particularly the UK and Europe. “I would base the chance of the US going into recession at 60 – 70%.”

Cilliers said that amid the turbulence created by the Covid pandemic, the Russia/Ukraine war, and now a slowing in global growth, people look to the safety of the dollar as an investment tool.

He said that the US will, in the meantime, continue along its path of aggressively hiking interest rates – further raising the likelihood of a recession.

“So for as long as we have this uncertainty with us, and we don’t really know where things are going, I think this whole thing of ‘I’m buying dollars’ will continue because we need a little bit more certainty.”

He said that the rand will continue to fluctuate and is vulnerable during this period of uncertainty. However, he said that mid-month data for July shows an overrecovery in local fuel prices, which should lead to some relief at the pumps at the end of the month. The strategist said that if this type of data continues, it will lead to some stability.

Until then, Cilliers stills sees room for the rand to appreciate and questions should be asked about arguments in favour of local unit weakness from current levels. That sets in motion an economic response that sows the seeds for a reversal.

History shows the rand tends to decline sharply when the world’s economic engine is in recession, Bloomberg reported.

Based on Bloomberg scenario-planning tools, the US recessions of 2008/9 knocked as much as 13% off the rand’s value. Based on its scenario-planning tools, similar conditions this time round could see the rand weaken by about 12%.

Overall global market volatility is a sign of the struggle “to gauge whether we are seeing, one, peak inflation and two, peak interest rates,” Lale Akoner, strategist at BNY Mellon Investment Management, said on Bloomberg Television. She expects the US dollar to remain higher for the next six months.

Corporate updates such as Apple’s are helping markets to calibrate the risk of recession. Signs that high inflation and monetary tightening are squeezing consumers and employment could feed into worries that an equity revival since mid-June is merely brief respite in a bruising bear market, said Bloomberg.

“We’re in a period over the next couple of weeks where corporate headlines are really going to drive market activity,” Anthony Saglimbene, global market strategist at Ameriprise Financial, said on Bloomberg Television. The focus is on how labour and input costs and demand are shaping the outlook, he said.

Read: Expect a big interest rate hike this week: economists

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