While domestic positives for SA thus far outweighed the negatives, that is changing. Deepening power outages that will weigh on economic growth have already caught rand bulls off guard.
Not all the bulls have given up. The sell-off could abate if China’s economy recovers strongly and the SA Reserve Bank follows through on its promises of aggressive policy tightening, according to Societe Generale SA.
“We see the recent sell-off in ZAR as overdone, driven by accumulated negative news on the domestic and external fronts,” said Marek Drimal, the London-based lead CEEMEA strategist at SocGen. The lender sees the rand at 15 per dollar by year-end.
“In our view, the rand is likely to recover in the second half of 2022 on the accelerated tightening by the Reserve Bank and the expected recovery in China.”
Markets are pricing in almost 200 basis points of rate increases by the end of the year, which implies at least one 75-basis-point hike at the three remaining policy meetings of the year. But as the Hungarian forint has shown, outsize rate moves don’t necessarily help the currency. The forint dropped as much as 1.6% after Hungary’s central bank lifted its policy rate by the most since 2008 last week.
“Although the rand has depreciated a lot in the past two months, its weakness can extend much further, especially if the US goes into recession,” the Nedbank analysts wrote.
“Cyclically, we favour rand weakness well above 17” per dollar, they said.
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