Nedbank: South African Rand Forecast Updates Shows Gentle Declines Ahead

- Bulk of good news surrounding SA already in the price of ZAR

- GBP/ZAR to end year higher than current levels

- Global sentiment to take the driving seat

Image © Pound Sterling Live

The South African Rand's outlook remains "relatively favourable" say analysts at one of South Africa's largest lender, Nedbank.

But, in an economic and financial briefing Nedbank simultaneously acknowledge that ZAR "is forecast to depreciate at a mild pace."

How can the outlook for the Rand be both favourable while at the same time being expected to ultimately decline in value?

Simply put, for Nedbank, those elevated downside risks seen in 2017 have largely evaporated; and any downside will be coming off the back of those strong post-Ramaphosa gains and weakness is likely to be ultimately contained.

The Rand has already risen by 12% against its US rival and 7% against Sterling in the six months to April 1, which is the result of investors rewarding an improved political and economic outlook for the country.

"We believe that the bulk of the good news on South Africa has been priced into the value of the Rand," say Nedbank, adding, "from here on the Rand will probably be driven largely by changes in global risk appetites."

So global sentiment is now likely to take the driving seat and with global growth still ticking along nicely, commodity prices firm, ZAR should fund conditions supportive.

"So far, risk appetites have held up reasonably well, buoyed by expectations for stronger global growth and continued recovery in key emerging markets. However, risk aversion flared up early in February and again in early March and could easily return, especially if China’s growth disappoints and global commodity prices relapse, geopolitical tensions rise suddenly and uncontrollably, or if US interest rates rise faster than currently anticipated," say Nedbank.

Furthermore, those watching the Rand must be wary that "local political tensions and policy impasses could also hurt the Rand."

The Pound-to-Rand exchange rate is forecast at 17.526 in the third-quarter of 2018 by Nedbank, and 18.052 by the end of the year.

The USD/ZAR exchange rate is forecast at 12.375 by the third-quarter of 2018, before ending the year at 12.7460.

The EUR/ZAR exchange rate is forecast at 15.225 by the third quarter of 2018, and is expected to end the year at 15.604.

The Nedbank position on ZAR is markedly different to that of South Africa's largest lender, ABSA.

We have reported that ABSA are forecasting a stronger Rand in the remainder of 2018, arguing that stronger economic growth should prove supportive to the local currency.

"Many of South Africa’s most significant constraints and challenges will be hard to fix. Still, the slide in the sovereign’s credit ratings seems to have been stopped for now. We now forecast stronger GDP growth of 1.8% this year and 1.9% for 2019, up by 0.4pp and 0.2pp,” says Peter Worthington, a senior economist at ABSA.

As a result, the USD/ZAR rate is expected by ABSA to fall further over coming months, dropping to 11.0 before the end of June and then rising steadily to 11.30 and 11.50 respectively by the end of the third and fourth quarters.

The Pound-to-Rand rate is predicted to fall to 15.29 before the end of June before rising to 15.82 and 16.33 respectively before the end of the third and fourth quarter.

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