Rand to weather emerging markets storm, tighten up versus dollar

The rand is expected to weather the emerging markets dollar storm better than its peers over the next 12 months due to attractive interest rate returns, despite a weak economic start to 2018, a Reuters poll found.

The rand is expected to recover to 12.50 per dollar in 12 months from 12.76 currently, more than 2% firmer, according to the median forecast of around 30 strategists in the June 4-6 poll.

“Our real interest rates remain attractive and could lure capital flows back, once the ‘risk-off’ sentiment subsides,” said Elize Kruger at NKC African economists.

South Africa’s central bank kept its benchmark repo rate at 6.5% last month after cutting it at the previous meeting, as it weighs up the risks to consumer price inflation against a fragile economic recovery.

No interest rate changes are expected until at least the end of next year, according to a separate poll last month.

Kruger reckons the rand’s fair value is around 12.35 per dollar, suggesting the currency has potential to firm up.

The poll was largely taken before the rand hit a two-week low against the dollar on Tuesday, in the wake of data showing the economy suffered its worst quarterly contraction in nine years during the first three months of 2018.

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Despite a hesitant start to the year, the renewed investment interest in the South African economy should lift economic growth more meaningfully while good global growth also remains supportive.

Analysts expect the dollar rally to have run its course and to gradually weaken towards the end of the year, driven among other factors by US twin deficit developments that should support the rand somewhat.

South Africa’s economy was expected to expand 1.8% this year after expanding 1.3% in 2017, last month’s Reuters poll found.

Still, business confidence fell for the fourth month in a row in May, mainly due to a slide in trade activity and higher consumer inflation following a hike in value-added tax.

Read: Business confidence index eases again in May