The rand should be worth R15.70 to the dollar
The rand is struggling to break past the R17.00/USD mark, but estimates show that it should be roughly R2 stronger than it is currently.
Wealth Investment Strategist Izak Odendaal said the rand’s fair value is as much art as science.
The rand is currently standing at R17.62.
Although this is better than the near R20 to dollar seen in May 2023, it is still much weaker than the roughly R14/$ seen in 2022.
The rand also stood at R11.57/$ in February 2018.
“One valuation approach is to employ the theory of purchasing power parity (PPP), which holds that the exchange rate will reflect inflation differences between two countries over time,” said Odendaal.
“Since higher inflation will erode one country’s competitiveness relative to the other, its currency will fall to adjust for this.
“A PPP estimate suggests a fair value range around R15.70.”
He added that another way to think about the rand is that it has been battered by several storms in recent years.
The US dollar has been especially strong, up 25% on a trade-weighted basis over the last ten years.
Commodity prices, especially platinum and palladium, have been soggy.
Emerging markets have also fallen out of favour with global investors, and South Africa has done little to convince them otherwise. Load shedding, logistics issues, and policy uncertainty have hurt sentiment.
“Some of these headwinds are now easing, and some are turning into tailwinds.”
“The good thing about storms, after all, is that they ultimately pass.”
“The trick is to have a diversified and valuation-based investment strategy to avoid anchoring incorrectly and getting buffeted by the wild market winds.”
Investec Chief Economist Annabel Bishop said the rand averaged R17.49/$ in the first 14 days of Q4 2024.
However, Bishop said that two 25 basis point cuts in interest rates from the US Federal Reserve should see the rand run stronger towards R17/$ by the end of Q4.
The South African Reserve Bank is set only to cut rates by 25 basis points, boosting the rand because of the interest rate differential.
That said, downward pressure on longer-term interest rates would be helpful for South Africa as long as the state’s borrowing trajectory also eases.
The annual Medium-Term Budget Policy Statement (MTBPS) is set to take place on 30 October (Medium-Term Budget Policy Statement). It is expected to improve fiscal metrics, as revenue collections are meaningfully higher than a year ago in August.
Odendall noted that the rally in local interest-rate-sensitive investments has lost some steam, but this should not be a cause for concern due to markets’ non-linear moves.
“It does seem, however, that further improvement will rely on positive news on the growth outlook, which would boost government bonds,” said Odendaal.
“The feelgood factor of the GNU has helped on the streets and in the markets since the election, but the budget is where the rubber hits the road, so the upcoming MTBPS will be an important milestone.”
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