The South African rand has shown its volatile side in recent days, having endured a torrid time last week, to peak above R15.00 against a resurgent dollar. This week however, the local unit has looked to regain some of those losses, in line with broader emerging market movements.
The rand is widely considered one of the most volatile currencies globally, which has been on full display over the past six months, showing no clear trend, dipping below R14.00 to the dollar in May and June, before weakening to above R15.00 in August, and then revisiting most points in that range during September, the South African Reserve Bank said.
“The currency is once again trading at pre-Covid-19 levels, and has even revisited pre-Nenegate levels, with the rand having been around R14.30 to the dollar at the start of December 2015,” it said in its six months monetary policy review on Tuesday (5 October).
“The local currency has benefitted from record terms of trade and a large current account surplus, as well as very low global interest rates.”
Analysts now believe that a shift in global inflation expectations from ‘transitory’ to ‘sticky’ will spare emerging market currencies a sell-off in the next few months as central banks consider or deliver near-term interest rate hikes.
A poll of economists by Reuters shows that the rand is expected to be a net beneficiary of this change, with local currency expected to mark a stronger final quarter of 2021 as it has in previous years.
The poll, conducted between 1-6 October, shows that the local unit is forecast to firm around 3% over the next six months to around R14.90/dollar.
Jeff Schultz, senior economist at BNP Paribas South Africa, said that the local currency will likely hover above the R14.00 against the dollar, before deprecating.
The group’s medium-term valuation model shows the fair value of the rand at around R14.00, which suggests a tactical opportunity for being bullish, he said in a research note on Thursday (7 October).
“This also underlines our bullish forecast of R14.25 for year-end. In the long run, however, the normalisation of the current account should start undermining the currency. Hence, we see a gradual depreciation in the rand in 2022.”
Bianca Botes, a director and treasury partner at Citadel Global, believes the rand could reach R16.00 against the greenback.
“While the rand typically sees a stronger period in Q4 and Q1 each year, this will likely not be the case for Q4 2021, although the domestic currency certainly is likely to be highly volatile and continue to see periods of marked strength and weakness indefinitely,” said Annabel Bishop, chief economist at Investec.
“That is, so long as the fundamentals of the currency do not deteriorate markedly (or conversely improve markedly), the rand will likely remain on a long-term depreciation trend, although cheeringly the chance of November credit rating downgrades has now reduced.”
Investec’s forecasts have the local currency at R14.70 to the dollar in Q4 2021, strengthening to R14.55 in Q2 2022.
Sanisha Packirisamy, an economist at Momentum Investments said that the rand has outperformed a broad emerging market basket of currencies, and commodity currencies since the start of the year. “We do, however, see scope for mild currency depreciations in the coming quarters as the US dollar strengthens moderately, as commodity prices soften, and as domestic growth and fiscal concerns weigh heavily on the medium-term outlook.
“Nonetheless, the pass-through from the currency into the inflation basket in recent years has moderated considerably on the back of weaker demand. This, together with credible policy frameworks and sound governance by the SARB, has aided the reduction in volatility of inflation,” Packirisamy said.
Momentum Investments said it expects inflation to average close to the midpoint of the 3% to 6% inflation target range for the next three years in the absence of any currency, food or oil price shocks.
“We view no immediate pressure on the SA Reserve Bank (SARB) to raise interest rates and therefore see the risks to the first interest rate hike as being tilted towards the first quarter of 2022. We expect a gradual normalisation in interest rates to follow,” Packirisamy said.
At 13h40 on Thursday (7 October), the rand was trading at the following levels again the major currencies:
- Dollar/Rand: R14.84 (-0.99%)
- Pound/Rand: R20.20 (-1.09%)
- Euro/Rand: R17.17 (-1.20%)