Rand Exchange Rate (ZAR) Forecast to Struggle in Face of Dollar Rally

The South African Rand exchange rate complex (ZAR) faces further downside pressures moving into 2015 warn analysts. 

The call comes as export-commodity economies that rely on external financing to fund their current accounts are forecasted to see further data disappointments as the US dollar continues its rise.

Last week, South Africa released very poor August trade and budget numbers which added to the downside pressures on the Rand from a domestic perspective.

According to a recent analysis by Heartwood Investment Management South African exchange rates could this data does not bode well for ZAR; a view echoed by BBH Foreign Exchange in their latest quarterly currency view. (See below).

Today's Rand Exchange Rates

The pound to South African Rand (GBP/ZAR) is 0.11 pct higher at 17.8744.
The euro to South African Rand (EUR/ZAR) is 0.02 pct lower at 14.0643.
The US dollar to South African Rand (USD/ZAR) is 0.28 pct higher at 11.0784.

[Please note all the above rate are subject to a discretionary charge when delivered by your bank. This can drive costs up by 5%, find out how to minimise this exposure. If you are looking for the best rate Don't Hesitate, ensure your FX provider has the correct stop-loss and buy orders ready, find out more.]

US Dollar Strength to Hit the Rand Lower

Commenting on the impact of a stronger dollar on Emerging Markets, Michael Stanes, Investment Director at Heartwood Investment Management, says:

“Shifting perceptions of the Federal Reserve tightening cycle and falling commodity prices are two themes that we have highlighted over the last couple of weeks. Their combined impact has been most forcefully played out in the emerging market (EM) currency markets as the US dollar has appreciated.

"The strong dollar trend has been in place since the end of June, with geopolitics and slowing Chinese growth also contributing factors. However, since the beginning of September, EM currency moves have been sharper and more volatile, and this bearish trend has spread to EM equities.

“What is becoming evident is a strong dollar and the outlook for higher US rates are burdening some EM economies more than others. Last week, South Africa released very poor August trade and budget numbers. The trade deficit was reported at its widest level in seven months (ZAR 16.3 billion/$1.44 billion).

"All of this decline was attributed to weakness in commodity exports, namely mineral products (-24.1% month-on-month) and precious metals (-14.6% m-o-m), resulting from weakening commodity prices and slowing demand from commodity-consumer countries. In addition, the budget deficit (around 4% of GDP) also widened in August, illustrating how the weak macroeconomic environment is putting downward pressure on government revenues.

“Other EM export-commodity producers that rely on external financing to fund their current accounts are also vulnerable, and we may see further data disappointments in the near term.

"The 'taper-tantrum' episode in May 2013, when the Federal Reserve indicated that it would start reducing its monthly bond purchases and reduce market liquidity, caused a significant sell-off in the “Fragile Five” countries (Brazil, South Africa, Turkey, Indonesia and India). All of these economies suffer from twin deficits and depend on capital inflows into their economies.

"What does this mean for the EM asset class more generally? Clearly, the risks are building, but certain economies, as noted above, will face stronger headwinds than others from US policy re-normalisation.

"That said, the potential of rising US rates is well flagged and the negative impact on EM assets may be more muted.

“Yet in the absence of stronger EM growth, it’s hard to see the catalyst for a sustained broad rally. The impact of falling commodity prices and solid US growth could have a positive impact on EM manufacturing-based economies which also happen to be commodity importers. Asian countries seem to be better positioned as a whole.

"The depreciation of their currencies could boost external demand, particularly as US consumption increases. Moreover, lower commodity prices and a strong dollar should keep US inflation contained.

"That should allow the Federal Reserve to adjust monetary policy very slowly, helping to avoid a nasty shock to the global economy."