ZAR Forecasts 2016: South African Rand is a Sell say Commerzbank, EURZAR @ 19.00
- Written by: Gary Howes
The SA rand is exposed to a ‘Classic Problem’ at the start of 2016 argue analysts who see the EUR to ZAR conversion potentially hitting 19.00.
What is the Rand exchange rate complex falling? Forget about the Zuma/Nene episode - that is last year’s news.
While domestic politics will of course remain on the agenda for the Rand in 2016 the new year has kicked off with more losses for ZAR, this time thanks to China.
“China's turmoil is raising the pressure on emerging markets, many of whom were in any case already battling economic problems last year. In the wake of the Fed's change of course, this is an almost classic problem,” says Bernd Weidensteiner at Commerzbank in Germany.
During such periods, investors have in the past withdrawn massive sums from emerging markets, whose financial markets, banking systems and currencies have run into difficulties as a result.
“Now more than ever before, we expect the growth advantage which emerging markets have enjoyed relative to industrialised economies to decline further,” warns Weidensteiner.
Sell the South African Rand sat Commerzbank Strategists
With the focus squarely on commodities Commerzbank strategist Peter Kinsella says he sees opportunity in betting on further Rand declines, particularly against the euro.
“The on-going commodity price slump affects ZAR more than most currencies. As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” says Kinsella.
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Furthermore, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests.
“Last year SARB surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive. South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months,” says Kinsella.
China - There is Some Hope for the Rand
The latest upsets emanating from the Far East should not be blamed on the weak fundamental data coming out of the economy, such as this week's PMI indices.
Rather, it is the Chinese Government’s management abilities that should be taking the blame argue Commerzbank.
“An economic slowdown in China had been expected for quite some time, and the reasons are well known. Instead, market turbulences can be traced back to growing doubts that the Chinese leadership can continue to successfully manage the economy and the markets,” says Weidsteiner.
We saw some sense from authorities when the scrapped the circuit breaker rule in response to the unintended panic it caused.
“The decision by Chinese regulators to dispense with their circuit breaker system has proven to be the correct one as the Asian traders have clawed back just over 2% of the week’s losses. Human psychology has had a strong hand to play in the way Chinese markets have behaved. The removal of the system that suspends the market should it fall too much has, ironically, seen the fear of entrapment reduced with Asian investors,” says Alastair McCain at IG in London.
Markets rewarded the move by rising on the final trading day of the week confirming a steady hand in China’s transition from a manufacturer/exporter to a more mature services and internal-demand lead economy.
The good news for the ZAR therefore is that we are not looking at a crisis.
“As long as the Fed does not panic, it is likely that matters should calm down
again over the coming months The Fed should continue to be fairly optimistic, since the domestic economy is doing well,” says Weidsteiner.
We would expect the South African rand to recover lost ground should the Fed ultimately steady the global financial markets.
