Rand rally expected to continue on market optimism, say analysts
JOHANNESBURG - THE RAND is forecast to rally to its strongest this month if market optimism continues, after it reached a six-week high of R14.44 to the dollar on Thursday lifted by growing bets that lending rates in the US would remain low.
The local currency shook off the sluggish manufacturing and business confidence data.
Manufacturing output in South Africa fell more than expected in February, declining by 2.1 percent while business confidence plunged to a four-month low, from 94.3 in February to 94 in March.
However, analysts said this week that the rand had the potential to extend gains and push to the R14.40 to the dollar mark supported by progress on the vaccine front and optimism over global economic growth.
The rand has been the star performer in the emerging market currencies space this week as it capitalised on the weaker dollar before the Federal Reserve’s March policy meeting.
The minutes of the latest Fed meeting revealed nothing new, with the Federal Open Market Committee committing to continue providing monetary policy support to markets.
However, the rand ended the week on the back foot on Friday, trading around R14.60 to the greenback as the dollar recovered some ground and Treasury yields moved higher.
TreasuryONE’s currency strategist André Cilliers said the rand remained range-bound, at least for now.
“The local currency remains range-bound for now, but is building a base around R14.45/R14.50 against the dollar,” Cilliers said.
Optimism about the pace of the global economic recovery gathered momentum in March as economists continued to upgrade forecasts for 2021 global economic growth.
The International Monetary Fund (IMF) has upgraded its 2021 global growth forecast to 6.0 percent from 5.5 percent while also raising its forecast for South Africa to 3.1 percent from 2.8 percent.
FXTM’s senior research analyst, Lukman Otunuga, said the past few months had been rough and rocky for emerging market currencies thanks to an appreciating dollar.
Otunuga said the rand remained the only emerging markets currency to appreciate against the dollar in 2021, currently up over 1 percent year-to-date as investor appetite was stimulated by US President Joe Biden's $2.25 trillion (R33trl) infrastructure plan.
He said a break below R14.50 to the dollar may open the doors towards R14.49 and R14.40, respectively, but a move towards R14.69 could be triggered should prices push back above R14.60.
“Given how raw materials account for roughly one-third of South Africa’s exports, the local currency has the potential to extend gains,” Otunuga said.
“Also, global sentiment remains supported by the progress on the vaccine front and optimism over global economic growth.
“If risk-on remains a key theme, the rand could extend gains against the dollar and other G10 currencies.”