ZAR Outlook Improves With String of Positive Economic Surprises

While the Rand exchange rate complex (ZAR) has started the new week off from a soft footing there may be brighter days ahead.

Data confirms the SA economy has outperformed analyst expectations in the latter half of 2014 and the currency should benefit from the improved picture.

That said, as we move through 2015 vulnerabilities remain and the bias is lower. Thus, those with an eye on the forex markets could do well by taking advnatage of any temporary strength.

Rand Rates Today:

• The pound to South African rand exchange rate (GBP/ZAR) is 0.47 pct lower on a day-by-day comparison, the conversion rate is at 17.2356.
• The euro to South African rand exchange rate (EUR/ZAR) is 0.23 pct up with the conversion at 13.7493.
• The US dollar to South African rand exchange rate (USD/ZAR) is 0.61 pct lower and converts at 10.9585.

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Bank of America See a December Rebound for ZAR?

Incoming data point to a rebound in activity in late 2014, as the economy shows signs of normalising from significant strike-related distortions.

Matthew Sharratt at Bank of America Merrill Lynch says he is now looking for a rebound in GDP growth to a 2.1% qoq annualised pace in 3Q14 (data due 25th Nov) after just +0.6% in 2Q14 and compared to our previous 0.7% call.

the real surprise over the quarter was the 9.3% annualised jump in vehicle sales.

Together with the acceleration in retail spend to a 3.5% annualised pace.

All this bodes well for the Rand exchange rate complex in coming weeks.

Longer-Term Outlook More Balanced

While the ZAR is tipped to benefit from near-term improvements in the economic picture the current rebound is not expected to last as underlying momentum is simply
not that favourable.

"We expect instead that GDP growth is likely to moderate back to a 2.3% pace in 1Q15 with 2015 GDP growth on average registering a below trend 2.3%, as we had previously been forecasting. We now see a more balanced profile to growth risks in 2015 than during much of 2014, when risks were heavily skewed to the downside," says Sharratt.

Meanwhile, lower oil prices also provide some upside risk forecasts as BofA estimate that a 10% decline in Rand denominated oil prices could boost GDP growth by 0.4ppt on a 6-12 month view, if sustained.

Rand Forecast: Vulnerable Longer-Term

Turning to the South African currency, BofA note that the ZAR will remain volatile:

"We are taking a slightly more bearish view on Rand next year versus the USD, raising our average 2015 call 5.5% to 11.50. Rand has been volatile in recent months as bond and equity portfolio flows have fluctuated considerably.

"There still remains much uncertainty over the impact of Fed tightening, where we expect the first hike only in 3Q15. On our purchasing power parity metric, Rand is only a little undervalued at -0.6 standard deviations, implying vulnerability probably remains if portfolio flows come under sustained pressure as we suspect they might through mid-2015 as the market likely speculates over an imminent Fed hike. Our global strategists remain bullish USD and expect EURUSD at 1.20 by 3Q15."

BofA now see USDZAR peaking at 11.75 in 3Q15 butfalling to 11.50 by end-2015 on positive seasonal effects and ongoing SARB tightening.

"We expect the repo rate to end 2015 at 6.50% and now look for +75bps of tightening in 2016 (+50bp more than previously forecast) taking the repo rate to 7.25% by end-2016, up 25bp on our previous year-end target. Further SARB tightening should help USDZAR to stabilise lower to an average 11.20 in 2016, in our view," says Sharratt.