South African Rand Forecast Higher Despite Rising Fuel Costs

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- ZAR to trade mixed up until SA elections on May 8

- After elections currency to rise on ANC victory

- Rand to trade strongly in H2

The recent surge in oil prices has weighed on the Rand and other emerging market currencies of late, but the developments in global oil markets will not be enough to detract Standard Bank from their bullish forecast for the second half of 2019.

The South African lender still sees the currency rising versus the Dollar in the second-half of the year, despite headwinds caused by rising oil prices.

The rising oil prices are projected to reduce South Africa's trade surplus and stifle consumer demand as rising prices at the fuel pump eats into disposable income.

“International oil prices have recently risen above USD$70/bbl. This has, among other things, put some pressure on the Rand and, if sustained, could affect terms of trade via increased oil import bill which, in turn, will likely limit the extent of our projected Rand recovery. Nevertheless, we still see the Rand as undervalued and firming towards R13.40/$ by year-end 2019 premised on reforms,” says Thanda Sithole, an economist at Standard Bank in Johannesburg.

The Department of Energy announced on April 28 a petrol price increase of 54 cents / litre for 93 and 95 unleaded for the month of May.

Diesel will see a one cent / litre increase, while illuminating paraffin sees a three cents / litre increase.

Indeed, the higher oil bill South Africa as a nation will pay over coming weeks would be expected to weigh on economic activity.

Previous 2019 price rises have however not translated into a smaller trade surplus yet, as trade balance data for March attests.

The actual result of R5.0bn beat the consensus forecast for R4.8bn and the previous surplus of R3.9bn. It also confounded Standard Bank’s pessimistic forecast that “The trade balance data which comes out later today likely modestly deteriorated, from a R4bn surplus in February, in part due to higher international oil prices and rand weakness in March.”

If anything, the resilience of the surplus actually supports the bank’s stronger Rand outlook.

Standard Bank’s main argument is that the Rand is undervalued based on fundamentals and, therefore, due a rise. Another supportive factor is an expectation that Cyril Ramaphosa will be re-elected as President on May 8 and have a stronger mandate to push through urgently needed economic reforms, which will provide the basis for a stronger Rand in H2.

“The Rand is now weaker than our Q2:19 forecasts and should in our view largely trend sideways till the elections, albeit bouts of weaknesses are likely. After the elections, with a general expectation of a comfortable ANC majority and premised on credible, concrete policy reform steps, the rand should appreciate. Nonetheless, we are still concerned about the pace at which President Cyril Ramaphosa can implement such reform,” says Shireen Darmalingam, an economist at Standard Bank.

The implied probability derived from the options pricing suggests option traders largely agree with the Standard Bank view. The 3-month implied probability sees the Rand trading in a range of 13,41 to 15,71 on 25 July 2019, with a probability of 73.8%. On a six-month view, this range widens to between 13.02 and 16,43, with a probability of 75,4%, says Darmalingam.

The reason the Rand may be undervalued it because it has been pushed lower by a variety of one-off or non-fundamental factors. The first of these is the recent strengthening of the U.S. Dollar to which the Rand is negatively correlated, and the second is the SA treasury's decision to bailout struggling national utility company Eskom.

Whilst the Dollar could still rise further, the consensus appears to affirm a generally negative view for the currency, which in turn would support ZAR.

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