Struggling South African Rand Tipped for Brighter Days Ahead

  • Forex Analysis

"While we acknowledge these domestic risks, we believe that the ZAR’s valuation now appears more attractive and offers room for catch up strength alongside the ongoing rebound in emerging market currencies" - MUFG.

The Rand struggled for traction in the penultimate session of the week as the Dollar pared earlier losses but some offshore analysts have tipped the South African currency as a buy and Wednesday's Federal Reserve (Fed) press conference may have bolstered confidence in its prospects.

South Africa's Rand was one of the bigger fallers among the G20 currencies on Thursday as the Dollar rebounded from losses sustained after Chairman Jerome Powell acknowledged that an end of the Fed's interest rate cycle may be working its way through the pipeline.

Further declines in U.S. bond yields were quick to follow, adding to earlier falls that have been cited by analysts at MUFG as among the reasons for why the Rand could be likely to outperform in the weeks or months ahead.

"Our short-term valuation model which incorporates the impact of US yields and South Africa’s terms of trade is signalling that the ZAR is not fully reflecting the recent improvement in short-term fundamental drivers," says Lee Hardman, a senior currency analyst at MUFG.

Hardman and the MUFG team advocated selling USD/ZAR around 17.25 last Friday in anticipation of a move lower toward 16.60 in what would potentially be a further headwind for an often-correlated Pound to Rand exchange rate.

USD/ZAR shown at daily intervals alongside GBP/ZAR

Above: USD/ZAR shown at daily intervals alongside GBP/ZAR .

They have set aside recent market concerns about the domestic economy and say they expect investors to "continue looking through" the Fed's hawkish rhetoric now inflation is falling and the bank has slowed the pace at which it's raising U.S. interest rates.

"Investor sentiment towards the ZAR has been hit recently by heightened concerns over the negative impact on growth in South Africa from worsening energy supply restrictions, and speculation that an amendment to the central bank’s mandate is imminent," Hardman said.

"While we acknowledge these domestic risks, we believe that the ZAR’s valuation now appears more attractive and offers room for catch up strength alongside the ongoing rebound in emerging market currencies," he added.

The Fed Funds rate was lifted for the eigth time since last March on Wednesday but the quarter percent increase to 4.75% was the smallest since the very beginning of the Fed's tightening cycle and many analysts have cited this as reason for remaining bearish in their U.S. Dollar outlooks.

A softer Dollar is a potential boon for many currencies but especially those offering positive inflation-adjusted interest rates such as the South African Rand.

"We expect this year to be positive for EEMEA FX. The end of the Fed's tightening cycle and China's growth outperformance should benefit this asset class, despite slowing global growth," says David Hauner, CFA and head of emerging market cross-asset strategy at BofA Global Research.

Source: BofA Global Research.

"However, we do worry about a setback in March/Q2 given our calls for the Fed to still be hiking in May and not cut this year, and the S&P to correct 15%. The latest slew of increasingly weak US data could become a trigger for these risks to become priced into a greater extent," he warns.

Hauner and colleagues advocate buying South African assets but also suggest hedging exposure to exchange rates, which could limit the Rand's ability to benefit from any capital inflows.

Meanwhile, some local analysts have remained cautious about the Rand and its prospects against non-Dollar counterparts following a month littered with some of the most severe load-shedding and power shortages on record.

"For South Africa, its gains against the crosses have been typically less than peer emerging market economies, as investors worry about the country’s declining productive capacity as electricity supply shortages worsen," says Annabel Bishop, chief economist at Investec.

"Global financial markets will continue to watch the Fed closely, with risk aversion potentially subsiding further this week, benefiting risk assets, although foreigners remain negative towards SA’s portfolio assets as domestic risks rise," Bishop writes in a Thursday research briefing.


Above: Pound to Rand rate shown at daily intervals with selected moving averages and Fibonacci retracements of recovery from September lows indicating possible areas of technical support for Sterling.

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  • Ntokozo Dladla @Ntokozo Dladla
    Thanks you but rand next year
    Like 1