Rand uncertain, volatile into 2010
December 15, 2009
Next year is likely to see increased government debate and focus on the rand's value and appropriate level, which may well lead to downward pressure on the local currency, according to a leading economist.
Input from several analysts and economists reveals mixed views of the local currency's value come the end of 2010, forecast at R7.50-R7.80, R8.00, and R9.00 versus the dollar, with factors including higher inflation, growing risk appetite, the current account deficit and the impending FIFA World Cup set to have a volatile impact on the local currency.
Merina Willemse, economist at Efficient Financial Holdings said that despite the rand/dollar exchange rate's relative strength, it is expected to weaken somewhat throughout 2010.
"The prevailing sentiment in the rand/US dollar rate could persist throughout the first half of next year and this coupled with the economic boost expected from the soccer World Cup could possibly allow the rand/US dollar rate to weaken more moderately than expected."
"Further weakening however, could occur throughout the second half of 2010, causing the rand to weaken to levels of R9.00 to the dollar," Willemse said.
Efficient said that over the past few months, the rand had been dominated by international developments, with its outlook tied to general global financial market prospects.
"For the moment, it seems to be generally supported by positive sentiments towards emerging markets and commodity-linked currencies in particular, which continue to benefit from the carry trade," Willemse said.
"However, optimism towards emerging markets is largely liquidity driven are therefore is potentially vulnerable to changes in conditions and sentiment," the economist said.
Accordingly Efficient forecasted the rand to remain at R7.50 for the remainder of Q4 2009, but then climb to R8.50-9.00 in 2010, and R9.50-10.00 in 2011.
RMB analysts John Cairns and Nema Ramkhelawan also pointed to a provisional forecast suggesting a significantly stronger rand for 1H10 and a gradual depreciation thereafter.
"This equates to US dollar/rand at 7.25 at the end of 2Q10 and US dollar/rand 8.00 for the year end. The view is based on a consistent improvement in global economic activity," they said.
RMB said that although its forecast reflected a relatively benign rand environment, it anticipated high levels of volatility given that US dollar/rand averages a 26 percent range in a year.
"We expect that high-yielding currencies and particularly US dollar/rand will continue to be driven by growing risk appetite, which is likely to remain strong given the robust pickup in global activity anticipated in 2010."
"Our view is largely dependent on a sustainable global recovery and the broad-based US dollar trend," Cairns and Ramkhelawan said.
"The risk of a double-dip scenario, however, still remains and might provoke bouts of risk aversion toward the end of 2010," they concluded.
Vivienne Taberer, portfolio manager at Investec Asset Management also highlighted the trend for emerging market currencies, "which face few of the impediments hampering growth in the developed world, and are the engines of global growth.
"We expect emerging market currencies and therefore the rand to be well supported over the medium term," Taberer said.
Investec Asset Management said it was important to distinguish between dollar weakness and strength versus emerging market currency weakness or strength.
"The dollar is looking a little bit oversold over the short term, which could lead to some rand weakness versus the dollar, but against the trade-weighted basket the rand should continue to get the underpin from improved commodity demand and growth prospects," the group noted.
"South Africa, however, faces some unique issues, such as the much-vaunted current account deficit, so we do expect it to lag its emerging market counterparts over the medium term."
"However, over the shorter term that is early into the New Year, we anticipate that the rand will trade around current levels of between R7.20 and R7.60 against the dollar," Taberer said.
"With higher inflation than developed markets, the rand is likely to depreciate modestly in nominal terms, but to be slightly stronger in real terms. We would expect the rand to end 2010 between R7.50 and R7.80 versus the dollar," Investec said.
Carmen Altenkirch, senior economist at Nedbank, said for the current currency situation to change in 2010 there would either have to be a worsening in the general global climate or a sufficient improvement to merit a change in US monetary policy, which may cause the carry trade to fall out of favour.
"Of the two, a reversal in global fortunes looks more likely."
"Already, there are some early indications that the pace of the recovery is beginning to lose momentum this may be aggravated next year as fiscal stimulus measures peter out and some countries opt to start tightening fiscal policy again," Altenkirch said.
The economist pointed to two domestic factors that were likely to dominate next year.
"The first, is the 2010 FIFA soccer World Cup, which will see an estimated 500 000 tourists enter the country, this combined with more positive sentiment towards South Africa as a result of the event, is likely to support the currency in the early part of the year," Altenkirch said.
However, Nedbank added that government's increasing unhappiness with the level of the rand over the past few months had become clear, arguing that it was overvalued.
"Next year is likely to see increased debate on the appropriate level of the rand, which may well put some downward pressure on the currency as the year progresses," Altenkirch concluded.
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