Why the rand is set to strengthen - TechCentral

Why the rand is set to strengthen

Don’t count the rand out yet. Analysts at Rand Merchant Bank and ING Groep predict the South African currency, the second-worst emerging-market performer in the past month, will rebound against the dollar by year-end as the pull of improving fundamentals and the hunt for yield support buyers amid lingering political and fiscal risks.

The rand fell to a six-month low of R13.86/US$ this week as tepid economic growth, an ANC leadership battle and the threat of a widening budget deficit exacerbate an emerging-market currency sell-off. That pessimism may be overdone and investors should look through looming risk events, such as the treasury’s medium-term fiscal update and the ANC’s elective conference, and focus on sources of underlying strength like a narrowing trade gap, according to ETM Analytics.

“We would expect the rand to appreciate in a normal environment,” said Halen Bothma, a market analyst at ETM. “If you erase the risks like the ANC conference and the medium-term budget policy statement, the fundamentals are supportive. We are modestly bullish on the rand.”

The currency has fallen about 7% since touching an almost three-month high on 6 September as traders bought dollars on the expectation that the US Federal Reserve will raise rates later this year. The South African currency has scope to turn that around, according to Rand Merchant Bank strategist John Cairns, who sees it strengthening to R13 by year-end.

“Even with recent weakness, the rand is still trading within existing ranges,” he said. “There is still a high number of event risks that could easily see the recent rand moves reverse.”

Analysts agree that the currency will recover, with the median forecast in a Bloomberg survey for it to strengthen to R13.28/$ by year-end. Strategists have raised their rand projections through 2017 as the South African currency benefited from carry appeal, low inflationary pressures and the country’s longest run of trade surpluses in six years, which has helped to narrow the current-account deficit.

“There is a huge amount going on in South Africa, but the external environment is reasonably benign,” said Chris Turner, global head of strategy at ING. “We think dollar strength will have run its course by the end of the year and investors will get back to carry. The rand will likely benefit from those flows.”

Far from clear

The road forward is far from clear though. The ANC’s contest to elect a new party leader, already marred by violence and legal disputes, will culminate in a conference between 16 and 20 December, with the outcome highly uncertain.

Amid hamstrung growth, finance minister Malusi Gigaba’s medium-term fiscal statement on 25 October may show a weaker tax outlook. If there is a deterioration in the budget consolidation path, assessments by Moody’s Investors Service and S&P Global Ratings scheduled for 24 November could see the country’s local sovereign debt downgraded to junk.

“All these factors have affected sentiment,” Bothma said. “But the mushrooming trade account and narrowing inflation are all supportive of the rand. The currency could strengthen to a range of between R12.50 and R13.” — Reported by Colleen Goko, (c) 2017 Bloomberg LP

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