Cape Town - The South African rand’s more than 3 percent slump this year, the largest among major economies, has surpassed the expectations of the currency’s biggest bears and left it the most overstretched in a decade.

The rand is set for a rally to 10.55 per dollar by the end of March, from about 10.83 now, according to Danske Bank A/S, the currency’s second-most accurate forecaster in 2013.

It touched a five-year low of 10.961 on January 16, pushing it beyond Lloyds Banking Group Plc’s first-quarter prediction of 10.9, the most bearish of 27 forecasts in a Bloomberg analyst survey.

A technical indicator known as the relative-strength index rose to the highest on a quarterly basis since September 2002, signaling the rand has fallen too far.

“A lot of negativity is already priced into the rand and it’s looking very extended,” Mohammed Nalla, the head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg on January 17.

“You’d have to be quite brave to put up a speculative position” betting on further declines.

A reduction in the Federal Reserve’s unprecedented monetary stimulus program, which has pumped money into the global economy and boosted emerging-market assets, is weighing on the rand, just as labor unrest at South African platinum mines threatens to curb output.

Any gains would be supported by an improvement in economic growth, which strategists expect to reach 2.8 percent this year, compared with 1.8 percent in the 12 months through the third quarter of last year.

Stochastic Gauge

The rand’s quarterly relative-strength index rose to 72 yesterday, above the threshold of 70 that may suggest a rebound.

A measure known as the stochastic oscillator rose to the highest level since November 12, when it reached to 91 and the currency climbed 3 percent in the following 10 days.

This technical indicator, which measures the velocity of a security’s price movement to identify overbought and oversold conditions, stood at 89 on January 20.

The rand gained 0.2 percent to 10.8284 per dollar by 11 a.m. in Johannesburg.

“From a technical perspective the rand is certainly a bit oversold,” Ion de Vleeschauwer, the Johannesburg-based chief dealer at Bidvest Bank Ltd., South Africa’s largest chain of money-changers, said by phone from on January 17.

“There is room for a correction.”

The central bank may be forced to raise interest rates if a disorderly decline in the rand threatens to fuel inflation, said Sean McCalgan, the head of real-time research at ETM Analytics in Johannesburg.

Faster Inflation

Consumer-price inflation accelerated to 5.6 percent in December, from 5.3 percent the previous month, a report will show tomorrow, according to the median estimate of 22 economists surveyed by Bloomberg.

It would be the first increase in four months, taking price increases closer to the central bank’s upper limit of 6 percent. Higher rates tend to boost a currency.

“We wouldn’t be adding long-dollar positions at these levels,” Bruce Donald, the head of foreign-exchange strategy at Standard Bank Group Ltd., South Africa’s biggest rand trader, said by phone from Johannesburg on January 17.

The rand may strengthen to 10.75 per dollar in the first quarter and 10.5 by mid-year, Donald said.

That compares with a first-quarter median estimate in a Bloomberg survey for an advance to 10.55.

Ebury Partners U.K. Ltd., the top forecaster of South Africa’s currency over the four quarters ending December, estimates the rand will strengthen to 10.8 per dollar by March, before depreciating beyond 11 per dollar for each of the following three quarters.

Any recovery in the rand may be short-lived, given the nation’s reliance on foreign investment to finance the current- account shortfall, funds that are drying up as the Federal Reserve tapers its monthly bond purchases, Michael Keenan, a currency strategist in Johannesburg at Barclays Africa Group Ltd., said by phone January 17.

“The fundamental picture for South Africa remains bleak,” Keenan said.

“We have socio-political tensions, renewed labor issues, and the current-account and fiscal pictures aren’t likely to improve for a number of quarters. Combine that with global headwinds, and the rand is going to maintain a weakening bias.” - Bloomberg News