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South African Rand Extends Rally As Goldman Warns EM Currency May Have Peaked

June 10, 2020 at 14:13 by Andrew Moran

ZAR coins and banknotes of the year 2012 designThe South African rand is extending its rally midweek, despite analysts warning that the emerging market currency may have already peaked. The rand recently touched its best level in nearly three months due to investors’ risk appetite increasing amid greater certainty, reopening economies, and accommodative monetary policy. Has the rand peaked, or does it still have room to rally?

During the global market selloff in March, the rand crashed to an all-time low of 19.3416 against the US dollar. Since then, the rand has rebounded about 10%, which follows the pattern of other emerging market currencies in forex markets. This year, investors have been pouring into the greenback as a safe-haven play and to shield their investments from the chaos in the broader market. Optimism and confidence have contributed to the dollar’s descent and EM currencies’ rise.

Although South Africa has eased its coronavirus-induced lockdowns, the nation’s plight continues. The economy is forecast to fall approximately 7.1% this year, the government has warned of an increase in COVID-19 cases, and domestic business confidence is at a record low – the Bureau of Economic Research’s (BER) business confidence reading for the second quarter cratered to 5.

But the negativity may have already been priced in the rand during the market mayhem three months ago. So, for now, are opportunistic traders pumping up the rand to dump it later? Or is the bullishness justified? Either way, Goldman Sachs makes the case that the rand may have already peaked, and it could remain at its current level for the next 18 months. Depreciation could be the biggest factor.

Long-run risks to the path of USD/ZAR still appear to be skewed to the upside, in our view. For example, while the rand has scanned as deeply undervalued for some time, weak fiscal fundamentals in South Africa have contributed to a significant trend weakening in measures of fair value for ZAR over the post-crisis period, which we think can continue.

Other analysts present the case that greater capital flows and a pickup in global trade should be a boon for the rand. Plus, when you consider that South Africa’s real bond yields are some of the world’s highest, investors could continue diving into the high-risk, high-reward currency.

Where could the rand be headed? The consensus seems to be in the range of 15.50 and 16.50 against the greenback.

The USD/ZAR currency pair fell 0.11% to 16.6171, from an opening of 16.6320, at 14:06 GMT on Wednesday. The EUR/ZAR rose 0.12% to 18.8780, from an opening of 18.8562.

If you have any questions, comments, or opinions regarding the South African Rand, feel free to post them using the commentary form below.

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