Rocky road ahead for the rand, experts warn
With the rand experiencing major fluctuations in recent weeks, more bad news is possibly around the corner.
The local currency is currently trading at R19.15/$ against the dollar, undoing some of its recent gains – where the rand reached R17.55/$ on 25 July 2023.
Investec Chief Economist Annabel Bishop said that the summer holiday period in the Northern Hemisphere usually leads to risk-taking being numbed, which affects an emerging economy like South Africa.
“Markets consequently tend to be risk averse in this period, which can run from May to September, with both perceived positive and negative market moving events having an exacerbated effect on financial market indicators,” she said.
This results in increased volatility, and market reactions tend to be more pronounced.
“While the US dollar has been generally softer since the start of this year, with investors anticipating the end of the US rate hiking cycle as inflation eases, some uncertainties surrounding the peak in US policy rates and growing hopes of a soft-landing in the US economy appear to be supporting the greenback in recent weeks,” economists at Nedbank noted.
On the domestic front, the recent violent taxi strike in Cape Town hurt sentiment, whilst the country’s declining trade surplus led to further strains.
Prior to this, the rand had made a strong recovery, with economists at ABSA noting that global market volatility continued to moderate as global recession fears started to wain.
This reduced risk aversion and the reduction in load shedding were also seen as reasons for the improvement in the rand.
“We also believe that local investors have been reducing their offshore exposure in recent months to remain within their prudential limits,” the economists at Absa noted in their Q3 Quarterly perspective, which led to the gaining against the dollar following the record high seen in May.
Where next
The rand will still be influenced by what happens in the US in regard to further interest rate hikes, with the US Fed’s remaining steadfast in its battle against inflation.
In addition, China’s post-pandemic recovery is stagnating – with fears of deflation – which poses a risk to the rand, as China is South Africa’s biggest trading partner.
Absa strategist Mike Keenan said that it remains to be seen if China launches a stimulus package to help boost its economy, which would, in turn, help the rand.
Keenan said that continued economic weakness in China and a stronger dollar would deliver a double blow to the rand.
“Now that locals have rebalanced their offshore portfolios and given that we expect South Africa’s current account deficit to widen as commodity prices soften, we believe that further rand strength will be difficult to achieve,” Absa’s experts said.
“Moreover, the exchange rate is no longer deeply undervalued, according to our valuation models. We also believe that foreign bond investors will remain reluctant to reinvest their sizable coupons in the coming months.”
The group also noted that the solid exchange rate recovery that took place following the sharp sell-off in May has run its course.
Thus, the group is predicting that the rand will end Q3 at R18.00/$ (previous Quarterly Perspectives: R18.50) and end the year at R17.95/$ (down from 18.75)
Keenan admitted that Absa’s prediction is more bullish than the overall Bloomberg consensus (see below), with some of the group’s projections seeing the rand drop below R17.00/$
However, South Africans should not get ahead of themselves, as the several risks to the rand persist, which will likely keep it weak against the dollar.
Bishop said that there is only a 1% chance that the rand will be under R17.00/$ by the end of the year.
She said that it is far more likely (43% chance) that the rand will head towards the R20.50/$ point by the end of the year – bringing the rand to a record high.
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