Barclays' 2016 forecasts confirm the South African rand is predicted to struggle in the next year. The report comes at a time of renewed pressure for S.A's currency.
The ZAR is struggling in the current global financial climate, characterised byby losses in the commodity market. The GBP to ZAR trades at 21.78, USD/ZAR at 14.31 and EUR/ZAR at 15.40.
The losses over the past 48 hours have been steep, "the new threat to the rand is the renewed commodity slump. Gold dipped to a new post-crisis low yesterday; Brent oil got to its lowest since the crisis. Even though the oil story offers some offset, the commodity trend is clearly negative for all commodity exports, notably South Africa," says John Cairns with RMB in Johannesburg.
Note though that Cairns believes that while some rand weakness yesterday was clearly justified, "appears to us that the move was overdone. Once again the rand has been a sharp underperformer as other commodity and risk currencies only edged marginally weaker."
2016 Offers More Weakness, But no Rout
‘Mounting negatives’ are expected to keep the South African rand exchange rate complex under pressure in 2016 it is alleged by Barclays who have released their latest currency forecasts.
The suggestion that the ZAR will fall further will not be welcomed by those hoping for a stronger currency. Instead they will have to prepare for ‘more of the same’ - the currency has depreciated steadily through 2015.
The period of depreciation took off in May as China’s growth profile softened and the US dollar began to rally in anticipation of rising interest rates at the US Federal Reserve.
In short, these themes are still with us - the ZAR remains relatively sensitive to Fed rate hike fears because the SA bond market has become heavily owned by non-resident investors and SA bond yields continue to offer a negative term premium.
But the problem for ZAR bulls is that South Africa’s economic profile has deteriorated somewhat since May and domestic drivers could now become the key driver of a weaker rand.
“A weaker ZAR is likely to remain indicative of SA’s persistently sluggish economic recovery and structural current account deficit challenges,” says the latest edition of Barclays’ Global FX Quarterly.
Furthermore, it is alleged that the country’s policy mix remains currency negative; “we expect monetary policy to normalise gradually because inflationary pressures are not demand driven and FX pass-through remains limited, while fiscal stimulus remains hamstrung by disappointing revenue collection.”
Barclays have also warned of a credit downgrade by Fitch in 2016 as domestic fundamentals remain unsupportive to the current rating.
“Bouts of ZAR short covering are likely to remain short-lived, while moves higher in USDZAR are likely to remain swift and substantial,” note Barclays.
The US dollar to South African Rand exchange rate is forecast to fall to 15.00 by the middle of 2016 before edging lower to 15.25 by year-end.
So while the tone for the Rand appears negative the forecasted numbers suggest that we are bit likely to see an all-out rout.
What is obvious is that the liklihood of a strong ZAR recovery is remote.