** Rand / Dollar exchange rate was R11.80 at time of writing
The “strength” of the Rand in recent weeks has created a lot of debate in recent weeks, but forecasters are predicting that the South African currency could weaken in the coming weeks.
Following the ousting of Jacob Zuma as president and Cyril Ramaphosa announcing changes in his cabinet, the Rand has sat comfortably below R12 to the US dollar. Many people have attributed this to Rand “strength” but it is far more likely that the US dollar is weak rather than the Rand strong.
The team from Business Insider recently posted the below graphic from Deutsche Bank, highlighting that the German financial giant argues that the Rand is in fact expensive at current levels.
https://www.decusatio.co.za/wp-content/uploads/2018/03/DB-fx-valuation-model-Feb-2018-1.jpg
It’s important to remember that a currency is viewed as a pair. We typically reference the Rand against either the US dollar, Euro or Pound. While the Rand is viewed as “expensive”, the US dollar itself is also viewed as expensive so currency forecasting can be tricky.
This prompted me to go and look at some of the other major forecasters to see what they were saying around the Rand.
- Trading Economics forecasts that the Rand should be at R12.77 to the US dollar by the end of the first quarter of 2018 – https://tradingeconomics.com/south-africa/currency/forecast
- The median forecast for the Rand to the US dollar according to Bloomberg is R12.30 by the end of the year – https://www.moneyweb.co.za/news-fast-news/signs-that-traders-are-coming-to-terms-with-rands-new-normal/
- Investec have recently updated its economic forecasts for South Africa. When Investec puts together its forecasts, it outlines a couple of different scenarios and the potential for each scenario. It’s baseline case (45% chance of happening) to float between R11.90 and R11.55. However, it’s second most likely scenario (27% chance or better than 1 in 4) will trade between R12.35 and R15.80 by the end of the year
Summary:
Forecasting a highly liquid currency like the Rand is notoriously difficult.
This challenge is further exacerbated by a weak US dollar (which traditionally moves in an inverse relationship to the Rand), a mixture of euphoria around new political leadership and some significant economic challenges including financial weakness at State Owned Enterprises.
While the forecasts for the Rand have improved slightly, a variety of economic models continue to suggest that there is some risk to the downside.
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