South African Rand Forecast: ZAR Exchange Rate Weakness Ahead?

The South African Rand exchange rate complex (ZAR) is forecast to be undermined by a combination of a deteriorating domestic economic profile and the broader Emerging Market currency slump.

As shown in the charts, the rand has been caught in a sideways trend against the pound sterling over the course of 2014; the risks appear to however now favour a leg-up by GBP. Moves in the the US dollar will also be key - a rising USD will continue to undermine the broader ZAR complex and where USD/ZAR goes we could well see GBP/ZAR and EUR/ZAR to follow suit.

Driving the move will be a number of factors, as noted by the analysts quoted below.

First - the latest rand exchange rates:

• The pound to rand exchange rate, GBP/ZAR is 0.13 pct down at 18.0303.
• The euro to rand exchange rate is 0.26 pct lower at 14.1658.
• The US dollar to rand exchange rate is 0.21 pct lower at 11.1943.

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BBH Foreign Exchange: Fundamentanls in SA Deteriorte

BBH Foreign Exchange have just released their latest quarterly currency predictions - the outlook for Emerging Market currencies is biased towards the downside.

In addition, fundamentals in South Africa continue to worsen note BBH citing the current account gap which has widened to -6.2% of GDP in Q2.

Continued weakness in exports and commodity prices suggest further upward pressure on the external deficits.

"Inflation remains elevated, but should come down along with commodity prices. Given downside risks to growth and inflation across most of EM, we see steady rates and we think any EM tightening cycles under way will end up very shallow. SARB falls into this category. There is also a risk that the incoming SARB Governor will be more dovish than outgoing Governor Marcus," says the quarterly currency note.

Emerging market Currency Rally Stalls

The theme of a declining ZAR exchange rate must also be placed in context of a declining emerging market currency sector.

The EM rally stalled in Q3, and will have trouble extending into Q4.

BBH say:

"In the short-term, we continue to favour Asia and Latin America over EMEA currencies, but stress that investors should differentiate amongst EM: there are idiosyncratic risks across countries, and with potential bumps expected in the general investment climate, focusing on fundamentals will be key.

"Other factors in play include the vast differences in FX policies across EM, as well as falling commodity prices, which will benefit Asia and EMEA over Latin American countries. Continued easing by the BOJ and ECB will give renewed life to the search for yield, a strong benefit for EM debt."

Watch the Flows Back to the UK and US

High-yielding currencies such as the Australian and New Zealand dollars and the rand will also come under pressure as massive currency flows head back towards the United States.

The US Federal Reserve is on course to raise interest rates in 2015 ensuring yields on US assets will be set to increase.

The so-called commodity currencies have benefited in this period of low rates in the US - investors could simply borrow money at low rates and take advantage of higher yields in places such as South Africa.

The same is true of the United Kingdom - record low rates will soon be reversed and with it so the potential for flows from SA to the UK grows.

This should be one of the major themes to watch over the course of the next 12 months and hence why we believe GBP/ZAR is biased towards the upside.