Currency forecasts and the value thereof

Opinion piece by  Andre Botha – Senior Dealer at TreasuryONE

One way to gauge the outlook for the rand is to examine whether bank rand forecasts change over time. The obvious answer is, of course, but we need to understand what the reasons are. So with this in mind, we (TreasuryONE) decided to plot a couple of bank forecasts for the end of the year to see whether there is a material change in forecasts as we head towards the end of the year.

The opinions expressed in relation to reasons for forecast changes is that of TreasuryONE.

From the off, it is easy to see that most Banks have kept their forecasts steady except Nedbank and Goldman Sachs.

Some of the main reasons for banks keeping their forecasts the same may be:

  1. The positive trade balance due to the terms of trade in South Africa which has led to a positive trade and current account balance,
  2. The fact that in a world where little yield is found South Africa still remain one of the last vestiges for yield.

In our opinion, one of the reasons Nedbank has changed their forecast ever so slightly is that they believe that the Rand will continue to overshoot its fair value towards the back end of the year and that while the Fed was hawkish at their last FOMC meeting (being from a very dovish base), the tapering argument is still some ways away and will not cause a massive EM sell-off.

In our opinion,  the fact that Goldman Sachs has reiterated the point that South Africa had printed three current account surpluses in a row, they are assuming that the surpluses will carry on into 2022. They’ve also stated that the favourable headlines regarding electricity regulation and air travel have given signs that reform is on its way. The above, in our opinion, convinced them that they should lower their forecast to R13.00, however, they have issued a word of caution due to the third wave of COVID and uncertainty regarding public wage negotiations.

It will be interesting to see in next month’s heat map whether the current political turmoil in SA will weigh on forecasts and what the effects thereof will be.

This opinion piece was researched and written by Andre Botha, a Senior Treasury Dealer at TreasuryONE.