The rand has likely hit its ‘peak’- here’s where it is heading next, according to economists

The rand’s substantial weakness against the dollar has likely hit its peak and is set to strengthen in the coming months, says Nedbank economist Walter De Wet.

In a research note published on Thursday (9 April), De Wet said that for the first time this year, many of the negative events that rocked the global and domestic economy – including sovereign downgrades – are largely priced into the currency which has reached the peak of Nedbank’s forecast.

“To be sure, although it would be naïve not to expect the currency to remain volatile (especially as we head into month-end, with potential negative flows around the World Government Bond Index exclusion), we are now more constructive on the rand,” he said.

“Where we previously believed that rallies in the rand will fade (and these rallies should be sold into), we now approach the currency with more caution and take the view that weakness in the rand is more likely to fade.”

One of the key reasons Nedbank expects rand strength against the dollar is that much of its weakness was not due to country-specific events (such as sovereign downgrades) but due to the sharp decline in commodity prices and capital flight from emerging markets, said De Wet.

“If weakness was because of events in South Africa, such as downgrades that are more lasting and arguably not easily reversible, we would have expected rand weakness to last longer and extend even further,” he said.

De Wet said that capital is also likely to return to South Africa and other emerging markets once the world has got more of a grip on the coronavirus pandemic.

“Our base case is that capital will return to emerging market (EM) local bond markets in search of higher real returns. Capital returned after the 1998 Asian crisis, the 2001 US recession, and the 2008 GFC.

“The likelihood that capital will return to EMs after this recession is high, in our view. We believe the fact that developed-market (DM) bond yields remain close to record-low levels aids the case for capital flow to EM bonds – especially countries such as South Africa, where real bond yields remain very high,” he said.

Rebalance

Nedbank’s views are echoed by the Buerau for Economic Research (BER), which notes that the rand is ‘following a known pattern’, which gives an indication of where it could head to next.

Historically, in times of high volatility, the rand has weakened significantly, before the market re-balances, it said.

“It is a reminder that while the current weakening trend is reaching extreme levels, we have seen this before,” BER said.

Plotting the rand’s journey over the last few decades, the BER noted that the currency has followed a familiar path: in the 2001, terrorist attacks, and IT-crash; during the global financial crisis; and even the 2015 ‘Nenegate’.

“The key takeaway from these previous experiences is that, whereas it is hard to call the top, the rand does tend to strengthen again from extreme undervalued levels. We expect the same to happen this time around,” it said

Investors are also starting to look at emerging market currencies again as a possible opportunity.

Emerging-market currencies offer the best buying opportunity in more than two decades, according to Charlie Robertson, Renaissance Capital’s global chief economist.

“It’s the best time to buy emerging markets in over 20 years,” Robertson, 48, said in a Bloomberg interview on Monday. “This is the cheapest opportunity since the last time everyone hated EM after the Asian crisis and Russian default.”

The rand was trading at the following levels against the major currencies at 11h50 on Thursday (9 April):

  • R18.00/dollar (-0.95%);
  • R22.37/pound (-o.70%);
  • R19.59/euro (-0.77%);

Read: South African stocks rebound – but investors should tread carefully

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The rand has likely hit its ‘peak’- here’s where it is heading next, according to economists