South African Rand "Significantly Undervalued" says JP Morgan Eyeing Rhodium Prices

- Rhodium to SA's rescue
- South Africa's fiscal position greatly improved
- "Substantial undervaluation" seen on ZAR

South African Rand

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South Africa's surging earnings from Platinum and other related precious metals has boosted the country's trade account with the rest of the world to the extend that the South African Rand is left looking undervalued, according to new research.

Analysis from global investment bank JP Morgan shows that the market might be guilty of "consistently underestimating the persistence of trade balance gains" made by South Africa since mid-2020.

As a result, "ZAR screens significantly undervalued," says Anezka Christovova, EM/FX Strategist at J.P. Morgan.

The ongoing global commodity boom - that has seen the price of all types of commodity shoot up over recent months - will tend to benefit those countries that have them in abundance, South Africa included.

The boom has been driven by significant stimulus efforts in the world's largest economies, notably China and the U.S., aimed at overcoming the economic slump wrought by Covid-19.

Add to this an ongoing 'green revolution' and a more broader global economic recovery as vaccines push Covid-19 into retreat and the conditions for strong commodity demand is created.

Rhodium is particularly important from a 'green revolution' perspective as it is utilised to eradicate Nitrogen Oxide in catalytic converters.

And, South Africa has this member of the Platinum Group of Metals (PGM) in abundance.

Rhodium prices

Above: Rhodium prices since the start of 2020, chart courtesy of

"Most official statistics do not disaggregate the role of rhodium in PGM's, which historically has been dominated by platinum and palladium, and hence the further 88% rhodium price jump since 4Q20 may have been easily missed," says Christovova.

The rise in value of this precious metal mean economists at JP Morgan have "significantly upgraded" their forecasts for South African GDP growth and the current account balance.

They have in turn revised their fiscal deficit and debt/GDP projections lower for the current and next fiscal year to embed the commodity export price lift in recent months.

As a result, "ZAR should be the clearest beneficiary, in our view," says Christovova.

JPM PGM chart

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JP Morgan's new commodity export index, which now includes a split of the Platinum Group Metals (PGM) into Rhodium and Palladium, is now 64% higher vs. end-2019.

"We believe the substantial commodity Terms of Trade support has been thus far been underappreciated by markets. With most terms of trade indices relying on only platinum prices to proxy PGM, the market has not been able to appreciate the true drivers of the recent improvements in several of South Africa’s metrics," says Christovova.

The windfall gains such a Terms-of-Trade shock brings about substantially reduces fiscal risk premia says the research note from JP Morgan, allowing South Africa a chance to set itself on a path to fiscal sustainability – a scenario they say looked "very unlikely" until now.

The findings come as the South African Rand finds itself in a trend of appreciation against most of the world's major currencies, including its Emerging Market peers such as the Turkish Lira.

In fact, the Rand is the best performing currency of 2021:

Rand performance

Above: ZAR performance against the G10 in 2021

Rand performance

Above: ZAR performance against a selection of EM, CEE and Asian currencies.

The Pound-to-Rand exchange rate is down 3.0% in 2021 at 19.46, the Euro-to-Rand is down 6.80% at 16.79 the Dollar-to-Rand exchange rate is down 6.70% at 13.78.

The attraction of South Africa as an Emerging Market destination that offers high returns will only be boosted by expectations for the country's finances to find a more stable footing on the back of stronger export earnings.

JP Morgan's models suggest that the Rand now screens "significantly undervalued" by 5.5%.

"Importantly, with still substantial undervaluation, ZAR is well supported," says Christovova.

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