South African Rand Forecast 2016: ABSA Retain Bearish Stance

The SA Rand is projected to struggle in 2016 thanks to a combination of a strengthening US dollar, decline in investor demand for South African debt and a potential Fitch downgrade.

The South African rand is unlikely to find any material strength over coming months says a new report from ABSA who cite a number of external challenges.

The forecast comes as the South African rand looks to close out what has been undoubtedly a poor year: the pound to South African rand exchange rate has fallen from 17.90 at the start of the year to a record 21.93 in November.

The US dollar to South African rand exchange rate has meanwhile moved from 11.78 to record a high of 14.40 in November.

Momentum remains pitted against the SA unit as we move towards and into 2016 even before markets are able to digest pessimistic research notes.  

Why the The US Fed Will Keep ZAR Under Pressure

Central to the increasingly bearish stance on the South African Rand held by ABSA is the US Fed which is turning less accommodative as it enters a new higher interest rate era.

“We expect the USD to experience broad-based strength because the Fed is tightening its monetary stance at a time when many other developed market central banks are becoming more accommodative,” says Mike Keenan at ABSA in Johannesburg.

Carry trades of high-yielding currencies like the ZAR will therefore become more punitive to fund in USD.

A carry trade is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return.

The SARB has consistently offered higher yield than the US Fed since 2008 – investors borrowed money in USD and bought SARB bonds creating a huge inflow of currency that drove up the value of the rand.

Latest Pound / SA Rand Exchange Rates

	Live: 22.6056▼ -0.2% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.837 - 21.9274
**Independent Specialist	22.2891 - 22.3795 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Now that US rates are to rise currency has been exiting South Africa ensuring the rand declines. The same dynamic applies to the pound to rand conversion as the Bank of England is also looking to raise rates.

“Foreign ownership levels of SA bonds is slipping, which provides further evidence that the ZAR is becoming increasingly vulnerable to a flight to quality as a result of heightened US rate hike fears,” says Keenan.

Commodity Prices to Weigh

Furthermore, ABSA point out that a stronger USD environment can reduce the appeal for commodities, which are priced in USD, and commodity-based currencies, such as the ZAR

The data flow out of China suggests that demand out of the world’s largest consumer of commodities continues to ebb, which helps explain why commodity prices remain under pressure.

“We think commodity-based currencies such as the ZAR are likely to remain vulnerable until demand out of China rebounds,” says Keenan.

Watch Fitch on December the 4th

An immediate-term test for the South African Rand comes on the 4th December – ABSA believe that there is a significant risk that Fitch Ratings downgrades SA’s sovereign rating on this date.

“Investors will also be eager to see whether S&P Ratings, which is scheduled to give its country review on the same day, simultaneously revises the country’s outlook downward,” says Keenan.

Over the past four years, fading ZAR rallies has proven to be the correct strategy and ABSA say there is little evidence to suggest that the current bearish ZAR momentum will to abate soon.

But there are risks to the negative view – i.e the rand could spring a positive surprise if potential repatriation of offshore investments from local asset managers is higher than ABSA have priced in their forecasts.

Seasonality trends could also surprise while further interest rate rises at the SARB could defend some of that yield advantage South Africa has enjoyed over recent years.

ABSA studies show the ZAR often strengthens during the month of December (three times out of the past five years) because either many local importers are closed for the summer holidays and/or some have already bought their stock in the months leading up to December.

The futures market is currently discounting a 70% probability that the SARB will hike the repo rate by another 25bps at this month’s MPC meeting and is fully discounting a further 75bps worth of tightening by the end of 2016.

“If the SARB has to hike policy rates more aggressively and/or Fed tightening proves to be less than is currently expected, then the ZAR could benefit from a wider interest rate spread,” say ABSA.

South African Rand Forecasts

At the time of writing the pound to South African Rand exchange rate is at 21.56, it is forecast to be at 21.09 in March 2016, 21.30 by mid-2016 and is predicted to end the year at 21.81.

The US dollar to Rand exchange rate is seen at 14.33 at the time of writing. It is forecast to rise to 14.75 by March 2016, 15.00 by mid-year and 15.25 by the end of 2016.