South African Rand in 2017: a Game of Two ZARs say HSBC
Analysts at HSBC say they believe South Africa's Rand will endure a year of two halves.
“We believe the ZAR will weaken in H1-17; due to a combination of a challenging domestic backdrop and broader USD strength,” say HSBC in a research note seen by Pound Sterling Live.
This will be followed by broad strength in H2 – particularly versus the Dollar which is viewed as vulnerable to weakness from Donald Trump not being able to deliver on his infrastructure promises due to an intransigent Congress.
Poor First Half
A major problem for the ZAR is a heavy selling as money is withdrawn from the country in anticipation of higher returns in the United States.
Trump’s 'economics of reflation' has improved the outlook for the US economy and led many investors to withdraw their money from emerging markets and place it in US assets instead.
Another reason is the previous low yield outlook for the globe which led investors to take on emerging market risk is no longer valid.
South Africa has for years commanded high interest rates which in turn attracts foreign investor inflows which in turn keeps the ZAR bid.
In addition to the reversal of this demand, ZAR is also likely to be pressured by a stalling of efforts eradicate the Current Account deficit.
A widening Income Deficit – which is the difference between in and outflows of money earned – is a factor in the overall poor performance of the Current Account.
Strong Second Half
South African growth remains lacklustre at only 0.7%, and this combined with high inflation of 6.0% means budgets are squeezed as inflation devalues everyone’s earning power.
In these circumstances, the South African Reserve Bank (SARB) will be reluctant to put up interest rates, which will have the effect of weakening the currency.
(Remember higher interest rates attract capital inflows, by raising rates the SARB could presumably attract some of that investor interest once more).
HSBC do however reserve praise for the prudence exercised by the management team at the SARB.
And this should help the Rand.
“The more prudent stance of monetary policy (especially compared to some of South Africa’s peers) means that ZAR weakness in H1-17 will have room to reverse in H2-17, rather than face an ever more difficult inflation-depreciation spiral,” said the note.
This means the outlook is expected to improve in H2.
“We, therefore, expect USD-ZAR to rally toward 15 by the middle of the year," says HCBC’s head of emerging market (EM) FX Paul Mackel. “However, we then see USD strength fading in the second half. At those levels, USD-ZAR will look cheap and would be liable to a retracement back towards 14 by the end of the year.”
Outlook for the Pound vs Rand
While the longer-term picture advocates Rand strength in the second-half of the year, this strength appears to already be in strong supply when it comes to the GBP/ZAR exchange rate.
The pair is still in a short-term downtrend ever since the November highs at 18.2874 rolled over.
My studies suggest A break below the 16.2636 lows would open the way to an extension down to the next target at 16.0000.
Early on Monday, January 16 the exchange rate broke down below the 16.26, three-year lows after gapping down on news that the UK was heading for a hard-Brexit.
The gap was later filled, but the exchange rate remains vulnerable to further breakdowns, and only a break above 17.000 would significantly change the outlook to something more bullish.
