The Rand Could Now be Undervalued
- Written by: Gary Howes
The South African Rand (ZAR) continues to be hammered by the pound, US dollar and other majors - and further declines are likely warns a leading foreign exchange research house.
Analysts at ABN Amro have warned that they are looking to cut their estimates on the SA rand.
The downgrade to estimates comes as the South African currency breaks new boundaries against its major competitors with all-time lows against the pound sterling looking particularly severe.
However, it is worth pointing out from the outset that ABN Amro, like all the research houses we follow, do not see the pain inflicted on the ZAR as being unique.
Rather it is the entire emerging market complex that is suffering.
“The environment for emerging market currencies remains very negative. There has been a negative feedback loop between lower commodity prices, concerns about the global growth outlook, deterioration in investor sentiment, weak domestic growth and political challenges,” says Georgette Boele at ABN Amro.
Of course it must not be forgotten that the US Federal Reserve is expected to start its hiking cycle this year.
“We judge that Brazil, South Africa, Turkey, Colombia, Malaysia and Indonesia are the most vulnerable. Our forecasts for the Turkish lira, and Indonesia rupiah already reflect further downside. We decided to adjust our forecasts for the Brazilian real and the South African rand downwards,” says Boele.
Brazil’s real is the weakest emerging market currency having declined by more than 40% versus the US dollar.
Latest Pound / SA Rand Exchange Rates
  | Live: 22.6363▼ -0.07%12 Month Best:25.4721 |
*Your Bank's Retail Rate
| 21.8667 - 21.9572 |
**Independent Specialist | 22.3194 - 22.41 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
But ZAR is Undervalued, and Will Recover
ABN Amro note that the central bank in South Africa (SARB) is in a catch-22.
On the one hand, the economy is weak, while on the other hand a weaker rand is resulting in upward pressure to inflation.
Add to this strikes in the mining sector and power blackouts which will likely continue hampering the economy.
“With the Fed expected to start hiking this year, the rand will most likely remain under pressure mainly because of weak fundamentals,” says Boele.
Therefore, ABN Amro have lowered their ZAR forecasts further.
The Dutch bank’s new year-end forecast for USD/ZAR is 14.0 (from 13.5).
Interestingly though ABN Amro say the pain will only be short-term as a rebound will ultimately occur:
“As is the case for many emerging market currencies, the South African rand is substantially undervalued. So if sentiment on emerging markets eventually improves it is likely that it will rally strongly.”
Indeed, the following forecast table confirms that the bottom in USD/ZAR is around 14.00 in the second half of 2015.
Near-Term Direction Dependent on US Markets
There is no shortage of volatility in the near-term movements in ZAR.
It is worth pointing out that predicting near-term moves is pretty difficult as much of the movement is linked to Wall Street.
"Since Friday, USD/ZAR has gone from 13.66 to 14.02 to 13.55 to 13.97 to 13.55. Moves are almost an exact reflection of Wall Street and US Treasuries as it is purely risk-on, risk-off that is driving markets. This leaves the rand in the hands of shifting global sentiment and there is no clear direction which way the moods will shift today," says John Cairns at RMB in Johannesburg.
