Any South African Rand Strength Forecast to Ultimately Fade by Barclays

The South African rand will retan a soft profile against the US dollar and British pound going forward.

This is according to the latest research on the ZAR issued by investment bank Barclays.

Researchers note that that although the ZAR has weakened substantially and remains cheap on their medium-term BEER model (30% cheap).

“We recommend fading rallies. South Africa’s onerous external funding requirements, sluggish economic recovery, low labour productivity growth and falling real rates will likely result in extended ZAR weakness over the coming quarters,” says a note on the matter from Barclays.

The bank look for a nearly 10% depreciation versus the USD, to 14.70 in 12 months.

For the latest forecasts on the Rand please see our table here.

Rand Vulnerable to US Interest Rate Rises and China

In addition to domestic factors already mentioned there is the much-hyped threat posed by the raising of US and UK interest rates and a Chinese slowdown.

China continues to move into a phase of slower growth - the economy is maturing but the shocks to global trade are significant.

“China’s trade links (both as an importer of capital goods and commodities, as well as a trading rival to other export-driven countries) cast a large shadow across Asia, the commodity complex countries, and much of the developed world,” notes Head of Macro Research Ajay Rajadhyaksha.

The question investors want answered most is: how successful will China be at transitioning from an infrastructure- and export-led economy to one powered by consumption, and what will the hit to growth be?

“The answer will not be obvious in a quarter or even a year. The China story will be a focus of world investors for a long time to come,” says Rajadhyaksha.
 
In addition to China the South African rand faces risks from the prospects of a Fed tightening, which keeps adding risk premium to domestic yield curves.

It looks increasingly like a rate hike will take place in 2015.

“Our analysis indicates that the TRY, ZAR and MYR are the most vulnerable should external financing conditions deteriorate, partly explained by central banks that are constrained from intervening in FX markets to contain weakness while having limited room to hike rates due to very weak growth outlooks,” say Barclays.

On these concerns, the bank has, for example, revised up their forecast for USDTRY to 3.10 by year-end (from 3.05) and to 3.25 by Q2 16.