South African Rand Forecast | Will the South African rand strengthen?


October was the worst month for the South African rand against the US dollar since May 2020. Photo: Skorzewiak/Shutterstock

The South African Rand (ZAR) was one of the worst performing emerging market currencies in October, falling to its lowest level against the US dollar (USD) since May 2020. The ZAR lost 1.5% against the dollar.

The rand failed to benefit from a broader decline in the value of the dollar in October due to speculation that the US Federal Reserve (Fed) may slow the pace of its interest rate hikes at its meeting in december. The rand also weakened against other currencies such as the euro (EUR) and the pound (GBP), indicating that factors other than the strength of the greenback are weighing on the currency.

Why is the rand under pressure and what are the realistic expectations for the ZAR towards the end of the year?

Main Drivers of the South African Rand

The South African Rand is the official currency of the Southern African Common Currency Area, issued by the South African Reserve Bank (SARB). The rand is used in South Africa and Namibia, Lesotho and Eswatini alongside their local currencies, which are pegged to the rand. The rand was introduced in 1961, before South Africa became a republic.

The rand was valued at $1.40 from 1961 to 1971, then began to fluctuate, with the US dollar becoming stronger against the rand in March 1982. The rand declined from the 1980s onwards, high inflation and sanctions international organizations that have eroded its value. Political uncertainty, a growing trade deficit and an electricity crisis have driven the rand down in recent years.

The rand hit an all-time high against the US dollar in 2020, with the USD/ZAR exchange rate hitting an all-time high of 19.05 in April of the same year due to concerns over the impact of the Covid-19 pandemic. 29 on the country’s economy, especially its mining industry.

Mining accounts for around 5% of South Africa’s gross domestic product (GDP). The country has the world’s largest reserves of platinum group metals (PGM) as well as manganese, chromite and gold. It also exports various industrial metals and coal. As a result, global commodity prices and demand influence the value of the rand.

Inflation and interest rates in South Africa and abroad, as well as investor interest in emerging markets, are also important drivers.

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The Rand remains under pressure from deficits

The rand started 2022 at 15.40 against the US dollar and strengthened to 14.61 in early March. But the gains were short-lived and the rand began to decline, hitting 15.81 on April 1. It spiked above 4:00 p.m. in May. USD/ZAR broke through 17.00 in July and reached 18.40 on October 24, its highest level since April 2020. The pair fell slightly, trading around 17.73 on November 7.

The SARB last raised its policy rate, the repurchase rate, by 75 basis points to 6.25% on September 22, bringing it back to a pre-Covid-19 level. This follows a rise of 75 basis points to 5.5% on July 21, a rise of 50 points on May 19 and a rise of 25 points on March 24. The central bank’s Monetary Policy Committee (MPC) meets every two months and is expected to raise rates further at its November meeting.

The annual increase in South Africa’s consumer price index (CPI) was 7.5% in September, compared to 7.6% in August and 7.8% in July, the data shows. from Statistics South Africa. The SARB’s inflation target is 3-6%, and it expects the CPI to return to that range in 2024.

Economists had expected September’s CPI to remain at 7.6% and had predicted a 50 basis point interest rate hike in November, but forward agreements forecast another 75 basis point hike higher. later this month, according to Bloomberg.

Canadian bank CIBC wrote:

“In light of central bank governor Kganyago suggesting that the central bank will continue to tighten until inflation hits the midpoint of the 3-6% inflation range, year on year. In advance, market rate expectations headed for 8.50%, we didn’t see those extremes seen in late 2015.”

What does this mean for the value of the rand against other currencies?

South African Rand Forecast: Will the Rand Stay Under Pressure or Rebound?

USD/ZAR forecast

In their latest forecast for the South African rand, CIBC analysts sounded cautious, expecting the currency to return to 18 against the US dollar by the end of 2022, noting:

“The expectation of significant further tightening continues to weigh on growth assumptions and weigh on overall investor sentiment. deficit territory in 2023, highlights why speculative ZAR holdings have returned to levels last seen in March as international investors have been net sellers of foreign bonds over the past month.

“While investors remain wary of emerging countries running twin fiscal and current account deficits, South Africa is expected to have both in 2023, highlights why the ZAR looks set to remain on the defensive at least until there are signs of moderation in USD momentum.

Looking further ahead, CIBC’s USD/ZAR forecast shows the USD/ZAR pair falling to 17.25 by the end of 2023 and 16.50 by the end of 2024.

The latest ZAR forecast from Japanese bank MUFG was bearish on the rand’s short-term outlook, predicting that the USD/ZAR rate could rise to 18.60 by the end of the year. The pair could then decline in 2023 to 17.40.

“The rand’s failure to even stage a relief bounce underscores that the downtrend remains firmly in place. Heightened fears of a global economic hard landing have weighed more heavily on commodity prices in recent months, which led the CRB Industrial Commodity Price Index to extend its decline to almost 20% from the April peak.The decline in commodity prices triggered a terms of trade deterioration of South Africa which is consistent with a weaker rand,” according to the MUFG monthly report.

“Overall, we expect external developments to maintain downward pressure on the rand through the end of the year and remain more important than domestic developments in driving the rand’s performance.”

French investment bank BNP Paribas was positive in its 12-month ZAR forecast, expecting it to trade at 16 against the dollar from 18.00 in three months.

In the long term, according to the South African rand forecast for 2030 from AI pickupUSD/ZAR could retreat to 16.28 by the end of the decade.

EUR/ZAR forecast

At the time of writing (8 November), analysts saw potential for the rand to strengthen against the euro in the long term, following possible weakness in the short term.

The MUFG forecast for the South African rand for 2023 showed the EUR/ZAR pair rising to 18.12 in the first quarter from 17.67 at the end of 2022, but then falling back to 17.75 in the third quarter.

The EUR/ZAR forecast from Danish bank Danske indicated that the pair could drop from the current spot rate around 17.77 to 16.50 in one month, 16.30 in three months, 16.20 in six months and 15 .80 in 12 months.

GBP/ZAR Forecast

Similarly, Danske’s GBP/ZAR forecast estimated that the rand could gradually strengthen over the next year, with the pair rising from 20.45 at the time of writing (8 November) to 18.74 in one month. months, 18.34 in three months, 18.56 in six months and 18.38 in 12 months.

But in the longer term, the British pound against the South African rand is predicted for 2025 from an algorithm-based forecast service Investor Portfolio showed the pair rising to 20.714, from 20.231 at the end of 2023 and 19.976 at the end of 2022.

The bottom line

Are you looking for a South African Rand forecast to inform your currency trading strategy? It is important to remember that due to the volatility of the currency markets, it is difficult for analysts and algorithm-based forecasters to make accurate long-term forecasts.

We recommend that you review the latest market trends, news, technical and fundamental analysis and expert advice before making any investment decisions. Keep in mind that past performance does not guarantee future returns. And never invest money you can’t afford to lose.

FAQs

Is the South African Rand up or down?

The rand lost value against a strong US dollar amid high inflation and slowing growth in South Africa.

Will the South African rand strengthen in 2023?

The direction of the ZAR against other currencies could depend on, among other factors, US interest rates as well as South Africa’s monetary policy on inflation and interest rates, commodity prices raw materials and deficits in the country’s accounts.

Is it a good time to buy South African Rand?

Whether it is the right time for you to buy or sell ZAR is a personal decision that will depend on your risk tolerance and investment strategy. You should do your own research to get an informed view of the market.

We recommend that you review the latest market trends, news, technical and fundamental analysis and expert advice before making any investment decisions. Keep in mind that past performance does not guarantee future returns. And never invest money you can’t afford to lose.

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