The rand has strengthened significantly in recent sessions, regaining lost ground after five months in the wilderness, say economists at Nedbank.
According to the bank, the rebound has been largely driven by lower-than-expected US inflation numbers for October, which has reinforced the global view that global interest rates could start to cool off – not needing to rise much further or for much longer as US inflation returned to its targets.
From the US expectations, global risk appetite recovered, the dollar weakened, and the rand – among other currencies in emerging market economies – strengthened, the bank said.
“Domestic news flow was mixed but had little impact on the rand. The Medium Term Budget Policy Statement (MTBPS) was well received by the markets but has subsequently been overshadowed by persistent rolling blackouts, the strike at Transnet, and, more recently, the start of what could be a prolonged public sector strike,” said Nedbank.
Economists at the Bureau for Economic Research (BER) also pointed to US indicators being the main driver behind the rand’s movement – as has been the case for much of the year.
“Last week’s lower-than-anticipated US consumer inflation print sent investors into risk-on mode. US Treasury yields moved lower as investors revised down their expectations of where US interest rates could peak,” the BER said.
Markets are currently pricing in a 70% chance of a 50bps hike in December, which would break a streak of four 75bps hikes. Meanwhile, the dollar weakened significantly and fell to its weakest
level against the euro since August.
“The rand benefitted from the weaker greenback too and gained 4% against the US currency last week and reached its strongest level since September.”
Headwinds lie ahead, however, with the South African Reserve Bank expected to hike rates once again on 24 November, with current projections being for a 75bps hike – and some analysts warning that a bigger 100bps hike is not out of the question.
The rand is currently trading at:
- ZAR/USD: R17.21
- ZAR/EUR: R17.84
- ZAR/GBP: R20.35
The graphic below illustrates a weekly look back at the rand to dollar (ZAR to USD) performance as of Monday (14 November at 07:46 UCT):
Where to next?
The rand should end this year around current levels, Nedbank said.
“The risk to the near-term outlook remains tilted to the downside, with another Fed policy meeting in December and the ANC set to elect its leader also in December.”
Despite this, the threat of global recession will weigh heavily on all emerging market economies and their currencies next year – resulting in bouts of weakness.
“We do, however, expect the rand to strengthen moderately over the second half of 2023 as risk appetites return in anticipation of lower US interest rates and the passing of the worst of the global downturn,” it said.
This view has also been expressed by economists at banking group Absa. Its recent perspectives report for the final quarter of this year pointed to a recovery to R16.75/USD by year-end and a bottom out at R16.00/USD by Q1 2023.
Michael Keenan, a forex strategy researcher from Absa said that the rand has become oversold, underperformed and undervalued.
Despite such downside movements, the bank reported that their long-term projections, as well as the rand’s final settling point, are balanced on the level of risk aversion internationally.
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