Optimism swings rand predictions to R11 vs the dollar by the end of 2018

With the rand holding steady at R11.92 on the morning of Thursday, 25 January, there are continued talks around how much further the currency and economy could strengthen heading into the end of 2018.

According to a report by Reuters, South African bonds have become a top 2018 trade with investors backed by a strengthening currency, some of the highest inflation-adjusted yields in emerging markets and now the possible exit of unpopular president Jacob Zuma.

Yields on the benchmark 10-year bond are down more than 100 basis points from late-November peaks, with more positive factors expected to be added to the mix including an expected removal of Zuma and a prudent 21 February budget by finance minister Malusi Gigaba.

That may in turn dissuade Moody’s from cutting South Africa’s last remaining investment-grade credit rating, Reuters said.

“Second, the central bank predicted recently inflation would fall below 3 percent, the midpoint of its target band. While December’s rate quickened to 4.7%, the rand’s strength since end-November should moderate it from now,” it said.

“That offers bondholders above 4 percentage points in “real” yield, less than Russia or Brazil but well above what they can get in India, Mexico, Poland or Turkey. And with the rand strong, it also means interest rate cuts are on the way.”

Rand predictions

In January a number of analysts provided predictions on where they believe the rand was headed in 2018.

While four of the five analysts interviewed put the rand at a R14.50 mark against the greenback,  Gabriele Foa and Gabriel Tenorio, EM and FX strategists at Bank of America Merrill Lynch predicted that the rand could reach as high as R15 to the dollar by the end of 2018.

Sonja Keller, senior economist at J.P Morgan said that the firm’s base macroeconomic projections see the rand at R14.50 to the dollar – regardless of who won the December election. This was the same forecast given by Hans Redeker and James Lord, FX strategists at Morgan Stanley which considered the rand in the broader context of emerging markets.

“The high real returns offered in EM could well moderate a bit from 2017 levels, but are likely to remain higher as strong global growth keeps demand for local capital high,” they said.

Speaking to Reuters on Thursday, Morgan Stanley analysts said that they were holding a “long” South African bond position in belief that markets will soon price out a Moody’s downgrade and instead price in rate cuts.

However the analysts were noticeably more bullish on the rand which had already risen above the R12.25 per dollar rate they had predicted for end-March.

“We are more confident that our bull case is materialising, which would see rand at R11.50 (by end-2018), should the transition of power speed up,” it said.

Local analysts have also been positive on the currency with Investec economist Annabell Bishop stating in a note this week that the rand could strengthen to as much as R11 to the dollar, should the president be forced to step down.

Further strengthening would also cause fuel price cuts and place downward pressure on inflation, with the possibility of the rand moving towards R10 to the dollar should Ramaphosa continue to make reforms and promote growth, she said.

Read: These are the 5 big risks that may derail the rand

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Optimism swings rand predictions to R11 vs the dollar by the end of 2018