Warning for overvalued rand

The rand is likely to come under pressure after Eskom again implemented rolling blackouts on Friday (6 November).

“The rand is trading at a premium to fair value, with analysts seeing a realistic level of the currency closer to R14.75/dollar,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“This valuation indicates that a correction is on the cards for the local unit, the only question is when it will revert. The rand has remained range-bound over the past two weeks, and markets will be looking for a catalyst to drive the unit in a new direction,” Botes said.

This catalyst, Botes said, could come from a few elements:

  • New developments in the China-US trade dispute: new tariffs are set to take effect on 15 December and an extension of the trade negotiations and implementation of the tariffs would be deemed as rand negative;
  • The Federal Reserve changing its outlook: a more hawkish Fed would see the rand come under pressure, especially if the tone indicated that the Fed would hold off on interest rate cuts in the coming months;
  • Eskom: rolling blackouts would blemish the future growth outlook and would cause some pressure on the currency.

South Africa is also facing a further cut to its credit rating by Moody’s Investors Service which, according to Reserve Bank deputy governor Kuben Naidoo, could see a selloff of between $5 billion and $8 billion of its bonds.

Moody’s this month cut its outlook on South Africa’s rating to negative, meaning the next move could be a reduction to junk because its current assessment is the lowest investment grade. That would bring it into line with S&P Global Ratings and Fitch Ratings.

Like the other two major ratings companies, it’s concerned by deteriorating government finances and the indebtedness of state-owned companies such as Eskom.

South African Airways (SAA) meanwhile, will be placed under voluntary business rescue, a local form of bankruptcy protection in which an administrator takes charge and tries to turn it around. Once that process is underway, the government will give it a R2 billion bailout and provide guarantees to raise the same amount in new loans, Bloomberg reported.

Business confidence meanwhile, remained close to a three-decade low in November as companies continue to await decisive action by the government to revive the economy, the news agency said.

A sentiment index compiled by the South African Chamber of Commerce and Industry (Sacci) climbed to 92.7 from 91.7 in the previous month.

While President Cyril Ramaphosa has pledged to revive the economy, gross domestic product has now contracted for four of the seven quarters since he came to power and the chamber said there are structural bottlenecks that have to be removed before economic growth can reach its potential.

“The difficulty in decision making aimed at the inevitable structural adjustments necessary to let the economy perform better, are still lacking,” Sacci said. “The effect of indecisiveness and the time lapses to taking action are going to impact critically on the economy and therefore business and investor confidence as year-end approaches.”

Botes said that while bias is towards rand weakness in the coming months, the local unit continues to hold onto its recent gains, as the dollar treads water. A move towards R14.50 should not be completely discounted in the short term, she said.

“Key data events to keep an eye on in the coming week are local, Chinese and US CPI, local manufacturing, mining and gold production, as well as the ECB interest rate decision followed by the monetary policy statement,” Botes said.

In morning trade on Friday, the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R14.64  (-0.05%)
  • Pound/Rand: R19.26  (-0.12%)
  • Euro/Rand: R16.26  (-0.03%)

Read: The rand will hit R20 to the dollar in 2020 – and other ‘outrageous’ predictions from banking experts

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Warning for overvalued rand