Economists at Credit Suisse adopt a bullish stance on the rand as they see potential for a decline in USD/ZAR to the 14.90 area in the coming weeks. The rand will continue to trade as a proxy for the EM currency complex but local developments also point in a rand-positive direction. The main risk comes from the possibility of a change in the risk-friendly global environment.
Key quotes
“Although USD/ZAR has come a long way already in the rand rally that has unfolded so far this month, we see still mainly downside risks to the pair from here. This is in part because we think the outcome of the US elections and fresh hopes for a COVID-19 vaccine to be ready for use soon will keep risk markets upbeat and the EM currency complex supported.”
“While we expect USD/ZAR to be driven primarily by factors that are external to South Africa, local developments are rand-supportive as well. The arrest of the ANC’s Secretary-General, Ace Magashule, on 10 November could be viewed by investors as a signal that the government intends to pursue a market-friendly agenda once the economy stabilizes. Meanwhile, we do not expect the policy rate decision next week (19 November) to have a material impact on the rand.”
“On the assumption that global conditions will remain favourable for the EM currency complex, we set a short-term target for USD/ZAR of 14.90. At this point, we refrain from putting our base case forecast much lower given that the rand already managed to outperform many of its EM high-yielding peers between early August and late October. Meanwhile, if the recent correlation between USD/ZAR and the S&P500 remains in place, a drop in USD/ZAR to the 14.50 area will require another sizable rally in S&P500 to around 3,800, which is more than 7.0% above its current level.”
“Given its high-beta nature and historical tendency to mean-revert through large moves USD/ZAR is likely to rise in a notable way in case global conditions shift in a negative direction for the EM currency complex. That might happen, for example, if a sizable rise in US real rates triggers a broad-based rally in the dollar. In these conditions, we would look for a rebound in USD/ZAR to around 16.08. This level was a support level for many weeks. But this is not our base case.”
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