SA Rand Overvalued say Danske Bank Analysts in 2015 ZAR Forecast

The South African Rand exchange rate complex (ZAR) is forecast to head lower in 2015 as it is seen as being overvalued by analysts at one of the major banks who have shown previous form in calling the currency's direction.

In his most recent note to clients, Danske Bank's analyst Stanislava Pravdová-Nielsen says the outlook is bearish on a combination of both domestic and local factors.

The reasons behind this bearish call on ZAR is presented in this piece. However, we also explore the possibility that near-term gains could be seen for the South African currency as suggested in the latest technical forecasts issued by TD Securities.

First, for reference, the following rates are noted at the time of writing:

• The pound to South African Rand exchange rate (GBP/ZAR) is 0.56 pct lower on a day-to-day basis having reached 17.4288.
• The euro to South African Rand exchange rate (EUR/ZAR) is 0.77 pct lower at 13.7248.
• The US dollar to South African Rand exchange rate (USD/ZAR) is 0.70 pct lower at 10.8666.

Note: If you are looking for a higher rate ask your FX provider to put the relevant buy and stop-loss orders in place to ensure you get the right rate when it is hit, find out how here.
Note 2: The above levels, and all rates quoted here, are from the inter-bank markets - your bank will affix a spread at their discretion when passing on a retail rate. However, an independent provider will seek to undercut your bank, thereby delivering up to 5% more FX in some instances. Please find out more.

Why the ZAR is Forecast Lower in 2015

Stanislava Pravdová-Nielsen at Danske Bank gives the following reasons for the South African currency's negative outlook:

Growth. The South African economy remains very weak. The prolonged strike had a very negative impact on economic activity while private consumption keeps weakening. Q2 GDP numbers were weak with GDP of 1.0% y/y, down from 1.6% y/y in Q1. We forecast GDP growth of 1.6% y/y in 2014 and 2.1% y/y in 2015. The South African central bank (SARB) has revised further down its GDP forecast for this year to 1.5% (down from 1.7%) and 2.8% in 2015 (2.8%).

Monetary policy. The SARB continues to face contradictory policy choices. On the one hand, growth is very weak and clearly requires accommodative monetary policy, while inflation is stubbornly high and above the inflation target of 3-6%. However, the growth worries currently seem to outweigh somewhat higher inflation (mainly due to the exchange rate). Due to the weak economy, the SARB decided to stay on hold at its MPC meeting in September.

Given that growth is very weak, headwinds from the global economy having increased, declining oil prices, which is positive for South African inflation, we expect the SARB to stay on hold in the coming months. However, monetary policy will be very data-dependent. Hence, if inflation starts to accelerate, the SARB will hike interest rates to stem inflationary pressures.

Debt risks. A budget deficit of 4.0% of GDP is projected for 2013/14 .

Valuation. ZAR remains fundamentally overvalued (fair value around 12.50).

Risks. Deepening of the socioeconomic and structural problems, further downgrade by the rating agencies, and a widening current account deficit.

The rand has been under immense pressure recently, mostly due to negative global conditions but also partly due to uncertainty over the new central bank governor. The pressure on the rand eased somewhat after President Zuma named current Deputy Governor Kganyago as a new SARB Governor.

Markets welcomed his nomination positively. We have revised our short-term outlook for the rand in a negative direction as most global conditions have deteriorated while a decline in commodity prices is negative for the rand. Our medium- to long-term outlook remains the same. On a six- to 12-month horizon, we remain bearish given the fundamental overvaluation on the back of the large external imbalances.

But - Near-Term Timeframe Could See the Rand Climb

Shaun Osborne at TD Securities notes that from a technical perspective the Rand could show its strength:

"The USDZAR bull trend may come under a little more scrutiny in the next few weeks; the market remains underpinned by strong trend support at 10.8020 currently, and has the additional benefit of strongly entrenched (bull) trend momentum on the longer-term charts.

"Normally, this is positive a situation which we would not dispute. However, two failures at or near 11.38 in 2014 leaves the market struggling not far off the 2008 “flame out” point for the USD at 11.87 and sets up a potential double top on the chart (confirmed only on a break below the neckline at 10.2760).

"Daily price action looks soft so a test of 10.80 looks a strong possibility. If trend support fails, a quick test of support in the 10.25/30 area should follow. From here we would be neutral below 10.80 and bearish 10.27."