The rand is undervalued – this is where it should be, and why it’s nowhere close

 ·29 Apr 2024

The rand continues to struggle through volatile global markets – sitting far from its ‘fair’ purchasing price parity (PPP) value of around R15.00 to the dollar.

The local unit has seen a relatively wide range in recent weeks between R18.45 and R19.25 to the dollar.

While uncertainties around the 2024 National Elections at the end of May are contributing to the currency’s volatility, Investec chief economist Annabel Bishop noted on Monday (29 April) that global factors are the key driver.

“The rand eased below R18.80/USD at the end of last week, gaining moderately as the US saw a weaker GDP outcome than was expected,” she said.

This has fed into the now cemented narrative of “higher for longer” around interest rates, with the market only seeing the start of the cutting cycle in the US at the end of the year.

“The US core PCE deflator, key for the US monetary policy trajectory, remained unchanged in March at 2.8% y/y, with the stubborn nature of underlying inflation causing markets to push the start of US rate cuts out to December,” Bishop said.

“US interest rate expectation volatility has mainly driven movements in the domestic currency, weakening the rand.”

On a PPP basis, the rand should be about R15.00 to the dollar, she said—a position last seen in 2022.

According to the Big Mac Index – which tracks PPP in layman’s terms – South Africa’s ‘fair’ value for the rand (taking into account GDP) should be around R11.30 to the dollar. However, this metric does not factor in the various risks and sentiments that are built into forex.

The domestic currency ran below R14.50/USD in early April 2022, but weakened subsequently due to the rise in global risk aversion. At the time, the US was expected to hike interest rates, which it did. Global growth slowed, and the US dollar strengthened – and markets have been tracking that position since.

Election factor

While the rand is clearly suffering at the whims of the global economy – led by the US’ position on rates – the local elections cannot be discounted.

According to Bishop, political polls are showing some starkly different voter support levels for the May vote, undermining the rand.

The latest poll from Ipsos, released on Friday, continues to show the ANC below majority, at 40.2%, down from Ipsos’s February poll at 40.5% and October poll at 43%, with the latest survey taken during the months of March and April.

The most recent Ipsos poll also found “more than a third (35%) of registered voters express that there is “no political party that truly represents their views…underscoring the complex political landscape and the desire for change.”

With PPP (Purchasing Power Parity) more than R3.00/USD stronger, there remains scope for the rand to strengthen post the elections on an ANC majority or coalition which excludes the EFF—as the latter is seen as anti the private business sector, Bishop said.

However, with the rand is mainly driven by international events, the start of a sustained US interest rate cutting cycle would be the most significant factor in causing the rand to strengthen back to its PPP value, she said.

Read: Foreign investors are still keen on South Africa – here’s why

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