Rand to steady from sell-off, hold firm – forex strategists

The rand is expected to tread a resilient and steady path over the next year in the face of global uncertainties and local budget and economic growth challenges, a Reuters poll of foreign exchange strategists found on Thursday.

A Moody’s review of South Africa’s sovereign debt rating next week, the medium-term budget review at the end of this month and an economy struggling to get out of recession are all near-term hurdles for Africa’s most industrialised economy.

The latest Reuters survey, taken this week, showed the rand is expected to be stable in 12 months, firming about 1% to 14.25 per dollar from the current 14.40 rate.

The rand – an actively traded and volatile currency – sold off around a tenth of its value in August alone, caught up in an emerging market meltdown triggered by Turkey and Argentina‘s domestic politics and macroeconomic fundamentals.

“We expect the overshoot of the rand to fade further, but it will likely remain undervalued in the near-term to reflect lingering uncertainties and risks,” said Elna Moolman, economist at Standard Bank.

The South African Reserve Bank’s deputy governor on Tuesday said it will only intervene to protect the currency if “excess volatility or abrupt and disorderly adjustments” threaten the functioning of the market.

Still, the central bank has not been seen actively intervening in the currency market in recent years. Instead it has mainly stuck to using its repo rate according to its mandate of keeping consumer inflation in its 3-6% band.

The repo rate is currently at 6.50%, while annual inflation slowed to 4.9% in August.

Last month, the Reuters FX poll showed many emerging market currencies, which have had a torrid few months, will bounce back at least partially against the dollar in a year as weakening growth momentum takes the shine off the greenback.

Read: These comfort charts signal year-end recovery for EM

The rand recovered somewhat at the end of last month from this year’s weakest levels in August, which escalated to 15.69 early in September. It is still down almost 16% in 2018.

The United States and China are locked in a spiralling trade war where each has levelled increasingly severe rounds of tariffs on each other’s imports, in turn putting pressure on emerging market currencies.