Foreign exchange strategists from some of the world’s top banks give their views below on what 2018 might bring for the Rand.
The South African Rand dodged a series of bullets in 2017 and, just days ahead of the New Year, is boasting solid gains over almost all developed world currencies for the year.
Its performance comes despite a continuation of corruption saga in South African politics and took place against a backdrop of an economy that is still under pressure.
The Rand gained more than 10% against the US Dollar, taking it to 12.36 Thursday, and also made headway against the Pound, Yen, Swiss Franc, Canadian Dollar and Australian Dollar.
Public finances have been front and centre in more recent months and are set to remain the dominant item on the agenda for South African political leaders as 2018 gets underway.
The Treasury has barely more than a month to put together a fiscal plan that combines tools for revenue raising and reducing spending by a sufficient enough measure to reduce the budget deficit promptly if another ratings downgrade is to be averted.
Moody’s can be expected to announce in February, after the next budget, whether or not it will follow in the footsteps of Standard & Poor’s by stripping South Africa of its local currency investment grade rating.
If it does, South Africa’s debt will be reduced to “junk” status, with far reaching adverse consequences for the currency and the economy.
December’s election of Cyril Ramaphosa as ANC party leader, and resulting hopes of fiscal and political reform, may have lessened the chances of this although the election is unlikely to prove a substitute for a credible plan to address the budget deficit.
Foreign exchange strategists from some of the world’s top banks give their views below, on what the year ahead might bring for the Rand.
Petr Krpata, chief EMEA fx strategist, ING Group
"In the CEEMEA FX high yielding space, investors will face two key choices in 2018. Either aim for the skies and tactically fade ZAR and TRY sell offs (with both offering a substantial short-term return potential) or settle for a high quality structurally risk adjusted long RUB positions (where one picks up an attractive carry in the declining volatility USD/RUB cross)."
"ZAR rebounded sharply following Moody’s decision on 24 November not to opt for a credit rating downgrade (while S&P downgraded South Africa to junk on the same day, downgrades from both agencies were needed to expel local bonds from the World Government Bond index)."
"Although ZAR is undervalued, the risky and unpredictable domestic politics (which lead to sharp spikes in ZAR volatility) makes long ZAR positions tricky. Structurally, we prefer RUB, while tactically we look to eventually fade TRY weakness."
End-2018 ZAR/USD forecast: 0.0689 (USD/ZAR 14.50)
End-2018 GBP/USD forecast: 1.53
Implied 2018 GBP/ZAR target: 22.20
Ulrich Leuchtmann, head of FX strategy, Commerzbank
“The rand is vulnerable to global risk-off movements and more restrictive monetary policies in the industrialized nations. But domestic factors also cause increased volatility. The high level of political uncertainty entails the risk of further rating downgrades and thus of rand devaluation pressure.”
“In the medium to long term, we see the biggest depreciation risk for the rand in the market being caught on the wrong foot by a surprisingly hawkish Fed. However, we assume that the South African central bank (SARB) will be able to limit the devaluation pressure by raising interest rates.”
“All in all, we expect USD-ZAR to continue its upward trend.”
End-2018 ZAR/USD forecast: 0.0675 (USD/ZAR 14.80)
End-2018 GBP/USD forecast: 1.27
Implied 2018 GBP/ZAR target: 18.81
Sonja Keller, senior economist, J.P. Morgan
“Our base-case macroeconomic projections embed USD/ZAR at 14.50 in 2H18 with scope for a substantial over- or undershoot in 1Q18 depending on the political outcome.”
“Should the outcome of pending political, fiscal, and rating risk events (ANC elective conference, February budget, index exclusion on the back of downgrades) be benign, the monetary policy outlook would be impacted as monetary authorities could then consider an unchanged policy rate or even a rate cut next year.”
“Chiefly, should the fiscal authorities announce further tightening measures in 1Q18 and in a scenario with USD/ZAR at 13.50 throughout 2018, the SARB’s model-implied reaction function would suggest around 15bp-25bp of policy easing next year. This contrasts with our current expectation of one rate hike in 3Q18.”
End-2018 ZAR/USD forecast: 0.0694 (USD/ZAR 14.40)
End-2018 GBP/USD forecast: 1.34
Implied 2018 GBP/ZAR target: 19.30
Hans Redeker & James Lord, FX strategists, Morgan Stanley
“The high real returns offered in EM could well moderate a bit from 2017 levels, but are likely to remain higher as strong global growth keeps demand for local capital high.”
“Generally, EM countries are still in the early stages of the economic cycle as the 2014/15 EM recession forced EM countries, particularly those dependent on foreign funding, to clean up their balance sheets and eliminate their low-performing investments.”
“EMs strengthening their balance sheet positions, combined with their high real returns, make them attractive investment destinations.”
“Local investment should pick up, helping productivity to rise and thus meaning those economies will be able to withstand any additional pressure from Fed hikes.”
“We see particular benefits accruing to RUB, MYR, INR, IDR, ILS and PLN. We also see significant upside for ZAR provided a positive outcome from the December ANC Conference emerges.”
End-2018 ZAR/USD forecast: 0.0689 (USD/ZAR 14.50)
End-2018 GBP/USD forecast: 1.24
Implied 2018 GBP/ZAR target: 17.99
Gabriele Foa & Gabriel Tenorio, EM and FX strategists, Bank of America Merrill Lynch
“Optimism about US fiscal and Fed balance sheet unwind will likely see current account surplus countries, particularly those with hawkish central banks and/or decent real rates cushion outperform – we identify S Korea, Russia, and the Czech Rep.”
“On the other hand this backdrop would bring risks to countries that were the primary beneficiaries of inflows during QE years, have large external financing needs, and with relatively limited policy room. Our filters reveal MXN, TRY and ZAR as most vulnerable.”
“In relative value space, we like going long ZAR/MXN which takes advantage of the fact that political risk in South Africa is more appropriately priced than in Mexico. We are very concerned about the NAFTA renegotiation that is going poorly.”
“The consensus is bearish on South Africa and constructive on Mexico, while we believe that the surprises could be the other way around.”
“Investors remain net-long MXN according to CFTC records (Chart 70), while our proprietary Liquid cross border flows analysis shows record short ZAR positioning.”
“MXN and ZAR have similar carry and liquidity, and both tend to have roughly similar beta to USD/EM sentiment which should hedge the trade against potential USD strength due to tax reform, for example.”
End-2018 ZAR/USD forecast: 0.0666 (USD/ZAR 15.00)
End-2018 GBP/USD forecast: 1.40
Implied 2018 GBP/ZAR target: 21.02
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