What will happen to the rand?

Emerging-market currencies have had a tough year, driven by low commodity prices, which are at their lowest levels in 16 years; slowing growth in China; and the prospect of the US Federal Reserve starting to normalise interest rates.

These factors, combined with poor domestic macro fundamentals in South Africa, are expected to keep the rand under pressure in 2016.

At the time of writing on 15 December 2015, the currency had lost nearly 31% of its value against the dollar in 2015, reaching an all-time low of R16.05 shortly after President Zuma axed finance minister Nhlanhla Nene to replace him with the unknown ANC backbencher David ‘Des’ van Rooyen.

The removal of Van Rooyen to bring back former finance minister Pravin Gordhan helped the currency to strengthen somewhat, though it still trades at near-record lows.

When considered over the past five years, the rand has weakened from around R6.59 to R15.14 against the dollar at the time of writing, according to INET BFA data.

While the US Fed’s tightening of monetary policy will be negative for the rand (the Fed was widely expected to start raising rates on 16 December 2015, after finweek went to press), the quantitative easing programmes of the European Central Bank and the Bank of Japan will offer some support, according to MMI Holdings.

Domestic factors that will have a negative impact include delays in energy capital expenditure, disruptive labour tensions and sovereign ratings pressure, according to MMI.

Tightening liquidity from the US, combined with a relatively large current account deficit (expected at 4% of GDP in 2016), will likely make the rand more sensitive to global risk appetite, MMI predicts.

Weak commodity prices will also continue to weigh on the rand in 2016, says Rian le Roux, chief economist at Old Mutual Investment Group.

For commodity prices to improve, a stable dollar, improved demand from China and more industry consolidation, which will help remove excess supply from the market, is required, Le Roux says.

However, commodity supply adjustment is still in the early stages, MMI warned.

This is an excerpt from an article that originally appeared in the 31 December 2015 edition of finweek. Buy and download the magazine here.