The rand hasn\u2019t hit rock bottom yet, Bloomberg reported.<\/p>\n
Even after falling to its weakest level on record against the dollar this week, South Africa\u2019s currency has a better chance of extending the decline in coming months than rallying to stronger levels predicted by analysts in a Bloomberg survey, options pricing suggests.<\/p>\n
The local unit lost just over 3% on Friday, breaching R19.00 as the steep selloff of emerging markets continues, noted Bianca Botes, executive director at Peregrine Treasury Solutions.<\/p>\n
“The ongoing selloff brought on by the failure in confidence on the back of the Covid-19 fallout leaves countries such as South Africa, with poor fiscal metrics, with nowhere to hide. Fitch moved to downgrade SA further into junk terrain, with a negative outlook.”<\/p>\n
Fitch on Friday (3 April), adjusted its assessment of the country from BB+ to BB, with a negative outlook, leaving the rand to flounder against the major currencies.<\/p>\n
“The reasons cited are no surprise and in line with what markets already knew \u2013 weak economic growth and a deteriorating fiscal position. The announcement by Fitch, following last week\u2019s announcement by Moody\u2019s, comes as yet another hard blow to the local economy that is already under severe strain,” Botes said.<\/p>\n
And prior to Fitch, the rand had been pummeled by the risk sell-off sparked by the spread of the coronavirus, as well as a downgrade to junk by Moody\u2019s Investors Service last week.<\/p>\n
\u201cPrior to the corona crisis, our initial strategy had been to wait for the downgrade and then re-consider an overweight,\u201d Christian Wietoska, a London-based strategist at Deutsche Bank AG who sees the rand weakening to R20 per dollar, said in a note to clients.<\/p>\n
\u201cBut the situation has now changed and we find risk-reward as not attractive enough to get bullish immediately post the downgrade, considering the domestic challenges and the external backdrop.\u201d<\/p>\n
The median forecast of economists in a Bloomberg survey puts the rand at 16 per dollar by year-end. But there is less than 30% chance of this, according to Bloomberg\u2019s probability calculator based on prices of options to buy and sell the currency. The probability of the rand hitting 21 this year, however, is 52%.<\/p>\n
A depreciation to R21 is possible, said Lars Merklin, a senior strategist at Danske Bank A\/S, but it would be an overshoot. Danske\u2019s own forecasts see the currency weakening to R19 per dollar.<\/p>\n
The South African Reserve Bank doesn\u2019t target a level for the currency or intervene in the market to support it. It\u2019s been reticent to cut rates, however, citing concerns about the effect of a weakening currency on inflation even as the economy posted recessions in 2018 and 2019.<\/p>\n
Even a surprise cut of 100 basis points earlier this month leaves South Africa\u2019s real rate higher than many of its peers.<\/p>\n
\u201cThere is no long-term driver of growth,\u201d Merklin said. \u201cBoth the central bank and investors have for too long thought it was necessary to have a strong currency, rather than support the economy.\u201d<\/p>\n
With stagnant growth, low inflation, relatively high rates and growing consensus among investors that those factors will continue to plague South Africa for some time, the trend for the rand is weaker before it recovers – but then only to around R17 per dollar, said Merklin.<\/p>\n
\u201cCurrencies with weak fundamentals will continue to be hit hard in this environment,\u201d said Hans Gustafson, a strategist at Swedbank in Stockholm.<\/p>\n
\u201cSouth Africa\u2019s growth was weak even before the corona outbreak and government finances are deteriorating fast. Looking at the the real effective exchange rate, the rand has another 10% on the downside.\u201d<\/p>\n