Pressure on South African Rand Could Ease: Goldman Sachs

Above: Informal traders in Mamelodi, South Africa. Image © Government of South Africa, reproduced under CC licensing

There is enough negativity embedded in the price of the South African Rand and downside pressures should ease as negative global investor sentiment towards the Chinese economy improves.

This is the assessment of Wall Street bank Goldman Sachs, where currency analysts have taken a fresh look at one of 2023's worst-performing currencies in the developed market space.

Underperformance is attributed to South Africa's high exposure and sensitivity to Chinese growth expectations, which have disappointed in the post-Covid period with the country's rebound proving lacklustre.

The South African Rand is also among those currencies most negatively impacted by the Dollar's broader strength and the rise in the value of U.S. bond yields.

The stronger Dollar and higher yields have the robust nature of the U.S. economy to thank, creating a backdrop of Chinese economic underperformance and U.S. outperformance.

This divergence, according to Goldman Sachs, is negative for the Rand. Therefore, investors should be on the lookout for the moment peak divergence is reached and the gap begins to close again.

"The Rand has been among the currencies most impacted by the divergence between the U.S. and the Chinese growth outlooks that have been driving FX markets," says Goldman Sachs. "This has meant that USD/ZAR is now back trading close to year-to-date highs and the path there has been quite volatile."

The analysis from the investment bank shows that earlier this year it was South Africa-specific factors which were dominating the Rand narrative, but analysts now think the 'global' picture matters more.

In particular, the U.S.-China growth outlook.

Should it become "less divergent", the Rand can appreciate.

As such, barring a significant surprise, Goldman Sachs does not expect this week's SARB meeting to have a large impact on the currency market.

"With the disinflation process well underway, the SARB’s trade-off has become less severe and the probability of a negative feedback loop between rates, growth and the FX has decreased significantly. And, in relative terms, the difference in FX carry between ZAR and its high-carry EM peers is now less negative than earlier this year," says Goldman Sachs.

South Africa's economic growth profile is meanwhile seen to have improved with the surprisingly strong second quarter GDP reading prompting Goldman Sachs' economists to revise their 2023 growth forecast to 0.9% (from 0.4% previously).

"With USD/ZAR trading around 19, we think a significant amount of negativity is already in the price and pressures on the Rand should ease as the Chinese data starts showing signs of stabilisation," says Goldman Sachs.