Cape Town – Expect wide ranges in the rand, trading at R15.41/$ at 09:20 on Friday, because of the impact of external forces and as the market finds its feet after the “aggressive rand rally”, analysts said.
The rand, which retreated from its strongest overnight level of R15.25/$, regained all of its losses and some more for the year on Thursday.
“Over the past five days, the rand has been the second-best emerging market currency, appreciating 2.96% against the dollar,” Shireen Darmalingam and Walter de Wet, Standard Bank analysts, said in their Friday rand update.
John Cairns, Rand Merchant Bank (RMB) economist, said on Friday that the rand has recouped its early January underperformance.
He said the rand “is nearly back to where it was before the replacement of the finance minister (Nhlanhla Nene)”, adding that the rand has wanted to “push stronger” for a while.
“There is no clear evidence of what is driving this, but it is reasonable to think that sentiment became overly negative in early January and some long dollar positions have had to give up the game as USD/ZAR upside faltered,” he said.
The global environment has been in a “perfect sweet spot” for the rand, but gains are looking overextended and some caution is warranted on Friday, said Cairns.
“Expect wide ranges,” he said. “Not because of panic, like last week, but rather because the market must find its feet after the aggressive rand rally.”
He said panic over a potential global economic downturn receded with the Fed and ECB minutes suggesting an ongoing easy monetary policy.
“Some caution is due today,” he warned. “The oil and equity rally, which has boosted global sentiment, faltered overnight – feeding into a pullback in risk currencies.”
Standard Bank’s analysts agreed, cautioning people not to underestimate the impact external forces may have on local markets.
Cairns said the rand “outperformance is coming a little too quickly, particularly if you consider next week has the all-important budget.”
Standard Bank’s analysts concurred, saying that before Finance Minister Pravin Gordhan’s budget on February 24, there will be “a good chance that the rand and local bonds (will) tread water until Wednesday afternoon”.
“From a longer term perspective, we need more confirmation before we can say the trend has finally turned,” Cairns said.
“Our underlying longer-term rand view remains that the rand is heavily undervalued after close to five years of persistent weakness.”
He said RMB’s core view is that the rand will be substantially stronger in a few years. “Current rand gains play into this view, but this is not enough to confirm that the cycle has finally turned.
“Underlying problems of the current account imbalance, the probability of a rating downgrade and the local economic-political environment remain,” he said. “Most of all, history suggests that the rand will turn when the dollar turns.”