The curious case of the stronger rand

The rand has continued to surprise in recent sessions, holding firm against the dollar in a time of economic recession, high unemployment, credit ratings downgrades and political uncertainty.

By 15h45 on Monday, the rand firmed half a percent against the dollar to R12.87, ignoring the negative economic flow of news around a flat dollar and weaker commodity prices.

  • Dollar/Rand: up 0.63% to R12.83
  • Pound/Rand: up 0.59% to R16.32
  • Euro/Rand: up 0.59% to R14.39

In an investor brief out on Monday, research analyst at investment firm Nomura, Peter Attard Montalto, said that its rand forecast has been revised to R14.00 versus the dollar by the end of 2017 – a stronger position than the R15.50 it forecast at the start of the year.

According to the analyst, while South Africa’s risk profile has not changed much, and the investment firm still holds an overall negative view on South Africa’s economy, developments globally have helped the rand.

The key factor leading to a more positive forecast is the weaker US dollar in the first half of the year, the group said. Another positive is that emerging market assets have seen a supportive flow of capital this year so far.

Also playing into the revision is the fact that the market has remained stubbornly positive about the local economy, despite being hammered with junk status and recession data.

“Given the negative reaction of markets was so short lived after the reshuffle, and with markets constantly hanging onto every possible positive event as a turning juncture, market price action dynamics are different and biased on the positive-ZAR side,” Attard Montalto said.

“We still believe there is a strong asymmetry in ZAR price action favouring positive over negative moves despite more worrying narrative developments. The market continues to assume that every negative event is in fact a path to a better outcome for South Africa.”

The analyst maintains that this is mistake, saying that the low-growth status quo for South Africa is going to continue through the ANC’s elective conference and beyond – regardless of who wins. While upsides exist, Nomura does not see it as likely.

Among some of the deviations from the group’s forecast are South Africa dropping from the World Government Bond Index – following more ratings downgrades – which will push the rand weaker.

On the positive side, if deputy president Cyril Ramaphosa wins in the ANC election, the rand could break through R12 to the dollar, however Nomura cautions that things in South Africa won’t be too different under Ramaphosa either.


Read: Rand weakens further as S&P warns over central bank independence

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The curious case of the stronger rand