These are the major hurdles still facing the rand in 2016
Despite seeing some recovery against major global currencies, and being in a much better position than it was at the start of the year, the rand is still likely to end 2016 at R17 to the dollar, according to financial group, Nomura.
In an update published on Wednesday, Nomura revised its currency forecast for the rand down from a rather bleak projection of R19 to the dollar, to a more tempered R17.
Nomura cites changes in the US market where a level of R19/$ made sense in a “‘two Fed hike, risk-on’ world with mounting domestic idiosyncratic and political risk”.
However, the market is now in a “risk-on, yield-hunting” world – though very little has changed domestically, hence the weaker rand outlook.
“The fact that the domestic narrative hasn’t changed is an important consideration,” said Peter Attard Montalto.
“We still believe that asset prices (including the currency and local rates) currently markedly underestimate the political risk premia required into year-end after the local elections as the ‘war’ between the ANC’s factions resumes and with Jacob Zuma exercising (and remaining in) power – not to mention ratings downgrades still looking likely.”
The group also views the second half of the year as bearish for investors, with no progress made on rates, CPI or the current account deficit.
Taking new market conditions into account, and looking ahead to what is expected to be a turbulent political season to the end of the year, Nomura forecasts the rand to end at R17 tot he dollar in 2016, R18 to the dollar in 2017 and R16 to the dollar in 2018.
“This view includes downgrades in November/December but within a well telegraphed Fed hike in December of this year and an expectation of risk-on and buying of risk and EM assets to continue,” the group said.
In the short term Nomura sees the ZAR/USD flat around the current range of R14.00-R15.00 until September, as markets reprice for President Zuma not leaving office – though there is still a widely held view by foreigners that there is a strong possibility of Zumxit this year, the group said.
“We see further ZAR weakness through next year, with the local ratings convergence story and political noise into the ANC elective conference, but then see the possibility of Zumxit in 2018 as Jacob Zuma hands over to his successor early to ensure a victory in the 2019 national elections as being initially ZAR-positive even if policy actually doesn’t shift (particularly under Nkosazana Dlamini-Zuma).”
One thing that could cause a major upset in the markets, however, is a big cabinet reshuffle later in the year, Nomura said.
“We would revise our USD/ZAR forecast back higher on a major cabinet reshuffle which could raise the risks of immediate downgrades by the ratings agencies,” it said.
The possibility of Donald Trump winning the USA elections in November could also have an impact – though this would be tempered by the fact South Africa has limited direct trade relations with the US, than Asia or the EU, the group added.
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