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Goldman Sachs have downgraded their South African Rand forecasts, saying the "high octane" phase of the post-Covid recovery has now passed.
The Wall Street bank says the Rand remains highly dependent on the global investor mood, which bestows it a 'high beta' status.
'High beta' is investor parlance for an asset that has a strong positive correlation to global investor sentiment which is typically reflected via the performance of the S&P 500 index.
"Our empirical work consistently labels the Rand as one of Emerging Market FX’s most volatile and highest ‘beta’ currencies," says a currency briefing from Goldman Sachs.
The South African currency's recent sessions have underscored this point say analysts: after outperforming its Emerging Market FX peers in striking fashion at the end of August and in early September, this week the Rand has been one of EM FX’s worst-performing currencies.
"Over the medium run, we think the Rand’s high beta is more likely than not to be a tailwind rather than a headwind, given the potential window of opportunity for cyclical assets globally," says Goldman Sachs.
Indeed economists at the bank are of the view that the global economic expansion can continue, underscored by improved vaccination coverage and ongoing central bank support.
This would prove to be an obvious tailwind for Emerging Market currencies in general, and the Rand in particular.
And domestically, there are some supportive drivers to consider says Goldman Sachs.
They cite falling covid cases, a fourth consecutive quarter of significant current account surplus (their economists expect external balances to remain positive into 2023), and a strong second quarter GDP growth number that may take some of the pressure off of South Africa’s fiscal balances.
But the rub for Emerging Market currencies is that the easy gains might now be in the past.
"With the highest-octane phase of the global recovery in the rear-view mirror and the potential for a bumpier global market outlook ahead, we have argued that EM FX investors should aim to prioritise carry just as much as pure cyclical sensitivity," says Goldman Sachs.
Analysts warn that the Federal Reserve's policy on ending quantitative easing over coming months might inject "significant volatility" into the Emerging Market FX outlook which could make for a period of underperformance.
As a result Goldman Sachs raise their 3-month Dollar-Rand forecast to 13.75, from 13.25 previously.
They say those investors looking for exposure to Emerging Market currencies could be better served by Russia's Ruble.