Top forecaster sees rand rebound as local investor flight eases

There’s no place left to run for South African investors who want to diversify away from the country’s ailing economy — and that may be good news for the rand, according to the top forecaster of the currency against the dollar.

South Africa increased limits on the amounts institutions may invest offshore by 5 percentage points in February, to 40% for fund managers and 30% for pension funds. Most investors are at or close to those levels, providing crucial support for the rand at a time when emerging-market assets are under pressure from rising US rates, according to Mike Keenan, a Johannesburg-based strategist at Absa Group.

“That will cap the rand weakness,” said Keenan, who predicts the currency will end the year about 2.5% stronger at 14.25 per dollar. Absa was the most accurate forecaster of the rand versus the dollar in the third quarter, according to data compiled by Bloomberg.

The rand has slumped 19% since the beginning of April amid an emerging-market sell-off sparked by rising US rates and a stronger dollar, and fuelled by crises from Turkey to Argentina. South Africa’s economy sank into a recession in the first half, raising concern that tax revenue will lag government forecasts and strain fiscal targets. Political uncertainty surrounding land reform and mining rules also unnerved some investors.

“Our view also takes into account South Africa’s weak growth backdrop and the inflation cycle, as well as the challenging global environment,” Keenan said. Other risks to his forecast are rising US rates and an escalation in the US-China trade war, with South Africa’s reliance on commodity exports making it particularly susceptible to a slowdown in global growth, he said.

The rand edged 0.1% weaker on Thursday to 14.66 per dollar, extending Wednesday’s 2% slump that was sparked by the jump in US Treasury yields to the highest level since 2011. With foreign investors holding about 40% of government bonds, even after dumping R55.7 billion of the debt this year, South Africa is vulnerable to capital flight as higher US rates attract money to the dollar.

The odds on the rand reaching Keenan’s target of 14.25 by year-end are 73%, according to Bloomberg calculations based on the price of options to buy and sell the currency.

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