Absa sees rand heading to R17/US$

Garth Theunissen - Financial market analysts are rapidly updating their rand forecasts to factor in more optimistic expectations that the newly formed government of national unity (GNU) will spark much-needed economic reforms in South Africa.Absa said in a research note on Tuesday it now sees the rand ending 2024 at R17.50/US$ before advancing to R17.25/US$ by the end of the first quarter of 2025 with R17/US$ within sight beyond that if GNU optimism persists and global risk appetite continues to improve. The bank’s previous year-end estimate for the rand was R18/US$.Meanwhile, Swiss banking group UBS also issued a client note on Tuesday, saying the rand would likely strengthen to R17.80/US$ by end-2024 as investors welcomed news that five parties – the ANC, DA, IFP, PA and GOOD – had officially signed a statement of intent to participate in the GNU. UBS said just over a week ago, prior to the formation of the GNU, that lingering uncertainty over whom the ANC might form a coalition with pointed to a rand exchange rate of R18/US$ by mid-2025.New government"We believe President [Cyril] Ramaphosa’s re-election and the formation of [the] GNU have done enough to reduce the size of South Africa’s country risk premium. Accordingly, we now expect the rand to end the month at R18/US$ before recovering to R17.50/US$ by year end," Absa fixed-income and currency strategists Mike Keenan and Siyasiya Nonkonela wrote in a research note on Tuesday. "Although not our base case at this juncture, if the global backdrop becomes significantly more risk-seeking and/or investors and corporates become increasingly enthusiastic about the GNU administration, then a move towards R17/US$ and SA 10-year yield of 10.50% should not be ruled out over the medium term."‘Reform-orientated path’Zurich-based UBS analyst Tilmann Kolb also said on Tuesday he now forecasts the rand at R17.80 by end-December 2024, and has that same exchange rate pencilled in for the first two quarters of 2025 on expectations the GNU will result in more market friendly reforms in South Africa."We think the [election] outcome is positive for the rand: current president Cyril Ramaphosa remaining in office should keep South Africa on a reform-orientated path, and the involvement of the pro-business DA could support speedier progress and further focus on combatting waste and corruption," said Kolb. "While the market may give the new multi-party coalition the benefit of the doubt in the near term, the outfit will have to demonstrate that it can address South Africa’s structural and fiscal challenges and maintain unity."‘Broadly favpurable’The improved prognosis for the rand by Absa and UBS came as South African assets rallied on Tuesday as a bout of post-election optimism swept across financial markets, already buoyed by hopes that better-than-expected US inflation data might allow the Federal Reserve to cut interest rates this year.Tuesday also saw US banking giant JPMorgan upgrade South Africa from underweight to overweight in its Central Europe, Middle East and Africa (CEMEA) asset allocation, while S&P Global Ratings said the GNU was "broadly favourable" for South Africa&#039;s economic and fiscal outlook.Anchor Capital CEO and co-chief investment officer Peter Armitage said called South Africa’s election result was "a material positive surprise" adding that the ensuing rally in domestic assets presented one of the most compelling stories in the world in the short term. The JSE All-Share Index on Tuesday closed 3.5% higher, led by a surge in insurance, banking and retail stocks. Benchmark bond yields, an indicator of South Africa’s long-term borrowing costs and a proxy for risk sentiment, also dropped with the 2035 debt instrument yielding 11.47% compared with more than 12% prior to the 29 May election.Election sentiment"Globally, it’s risk on ... people are pricing in Fed Cuts. But the majority of what’s happening in the South African equity market is election-sentiment that’s driving a lot of SA Inc stocks," Hannes van den Berg, portfolio manager at Ninety One, told News24.SA Inc stocks refer to equities that are highly correlated with the performance of the domestic economy, with insurers, banks and retailers being the prime examples. Tuesday’s JSE rally was led by strong gains in Old Mutual, Sanlam, Capitec, FirstRand, Standard Bank, Clicks, Shoprite, Truworths and TFG."The actual impact of elections and global interest rate expectations are not necessarily changing company earnings expectations, but what’s currently happening is a sentiment shift," said Van den Berg. "People might start looking forward to interest rate cuts and a better consumer environment. We’re starting to see that the positive sentiment is driving a rerating in some equities. South African bonds have also rallied."Positive momentumInvestec economist Annabel Bishop said the peaceful formation of the GNU would likely give the rand further positive momentum towards the R18/US$ resistance level. Nevertheless, she said the currency might struggle to break through that threshold sustainably, at least until there was further clarity on the trajectory for US interest rates."The rand is likely to see pressure to track stronger this week, making up for lost ground as the pre- and post-election uncertainty hampered the domestic currency from making prior gains on waning risk aversion in global financial markets," Bishop wrote in a client note. "With South Africa’s election outcome seen as promoting stability, democracy and unity, financial markets attention will likely turn to the US interest rate cut timing." - Fin24

Absa sees rand heading to R17/US$

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