- Rand to be range-bound in short-term; long-term bullish
- USD/ZAR to trade between 12.00 and 13.00
- South African economy currently operating below potential
© Natanael Ginting, Adobe Stock
The Dollar-to-South African Rand exchange rate is likely to trade in a range before the South African (SA) Rand strengthens in the longer-term, says Nimrod Mevorach, an analyst at Credit Suisse.
"We expect USD/ZAR to trade in a wide range between 12.00 and 13.00 in the short run," says Mevorach, adding, "Further down the line, we remain structurally bullish on the currency and expect outperformance against the EMFX complex."
The main fundamental driver for the currency will be the fluctuations of the US Dollar to which it is highly negatively correlated.
A stronger Dollar tends to impact on the SA economy disproportionately because so much of the country's debt is either denominated in Dollars or from America, so a stronger Dollar increases their loan repayments.
Domestic fundamentals are unlikely to impact on the currency, except in extreme circumstances.
"As a base case, we do not expect domestic developments to shift the sentiment towards the rand is a big way," says Mevorach.
Nevertheless, the analyst discusses the main domestic risk factors each in turn.
Early elections, for example, are unlikely to impact the Rand unless the Ramaphosa administration loses support either internally or externally by losing its super-majority, neither of which are likely.
The government's controversial land reform policies do not seem to pose an economic risk at the moment but much depends on what use the lands are put to if and when they change hands. Our view is that if they go ahead the market's final assessment would probably be negative.
The policy is under assessment following pressure from the opposition party.
The main political risk for the Rand is via threat of Ramaphosa losing power, perhaps by generating opposition within his own ANC party if he is seen to dilute the original policies, perhaps, by removing the controversial 'expropriation without compensation' clause.
Economic performance is not impacting the Rand at the moment and is not likely to much going forward. Recent poor mining output data, for example, failed to move the Rand and suggests there is a high bar to sensitivity from poor data, due to the prevalence of an optimistic overall outlook for the economy.
Credit Suisse are structurally bullish the Rand longer-term, predominantly for three reasons.
The first is, in fact, that the SA economy is operating below its full potential and thus is likely to recover and start operating at equilibrium eventually.
The second is due to falling inflation, which they argue makes it less likely the Rand will need to weaken any further.
"The decline in the inflation differential between South Africa and its trading partners speaks in favor of the idea that the downside skew of rand’s pricing against the currencies of South Africa’s trading partners is less pronounced than it was in the past (i.e. the rand does not need to fall substantially against G10 currencies in order to keep the rand’s REER steady)," says Mevorach.
The third reason is their shrinking current account deficit.
The best way to trade USD/ZAR's sideways range is to 'fade' Rand weakness at the top of the range from domestic factors, which are likely to have only a temporary effect.
"As a general bias, we like long-ZAR positions against other EM high yielders in the spot/forward space," concludes Mevorach.
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