Outlook for the rand has darkened, Investec says
SA’s largest asset manager now expects the rand to average R14.15/$ in the fourth quarter, after previously expecting R13.90
The US-China trade war and political uncertainty in SA are weighing on the rand.
Investec, one of the country’s largest banks, has revised its fourth-quarter forecast downwards, and now expects the currency to average R14.15/$ in the fourth quarter versus the R13.90 it forecast previously.
“We continue to believe that the rand will remain volatile, and have revised down the expected case forecast for a somewhat more depreciated level as global trade tensions have worsened, and show little chance of resolving in the near term,” said Investec chief economist Annabel Bishop in a note.
Local political uncertainty is also playing a role, said Bishop, with a lack of resolution to Eskom’s problems and the announcement of the National Health Insurance (NHI) both negatively affecting the rand.
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The rand, which serves as a proxy for other emerging-market currencies, is only the third-worst performing currency over the past 30-days, according to Bloomberg. Its 6.5% loss against the dollar over this period compares favourably with a 9.2% fall by the Brazilian real, while the Argentinian peso has slumped 21%.
Argentina is in the midst of a debt crisis, while Brazil is experiencing devastating fires in the Amazon rainforest.
“If the news flow continues like we’ve seen recently and the markets get nervous, and this is coupled with a slowdown in economic growth, then emerging-market currencies will suffer, foreign money will flow out of the country, and we could see the rand weaken more,” said Sanlam Wealth portfolio manager Nick Kunze.
“In the fourth quarter we have Brexit, risks regarding the trade war, as well our own risk in November with a possible ratings downgrade from Moody’s Investors Service. So risks are definitely going to escalate in the remainder of the year. As long as these risks continue, the rand and other emerging-market currencies are going to be on the back foot ” Kunze added.
At 5.40pm on Tuesday, the rand had weakened 0.26% to R15.3236/$, 0.11% to R16.9898/€, and 0.8% to R18.8291/£. The euro was flat at $1.1102. At this level, the rand would need to firm 7% to reach Investec’s target in the fourth quarter.
The generic 10-year SA bond strengthened, with its yield falling 4.5 basis points to 8.930% on Tuesday afternoon. Bond yields move inversely to bond prices. The yield on the bond has risen 31 basis points since its 2019 best on July 18. Foreigners remain net sellers, having offloaded $2.3bn (R35bn) of SA bonds so far in 2019, after selling $4.7bn (R72bn) in 2018.
Markets continue to price in a series of interest-rate cuts from the US Federal Reserve. On Tuesday afternoon, the bets on a 25-basis-point September cut were 100%, while there is an 11.2% chance of a 50-basis-point cut.