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There is currently no reason to believe the rand won't "pull back", with the majority of trade for the rest of the year being concentrated in the R13.00 – R14.00 range against the US dollar, say analysts from Rand Merchant Bank Global Markets Research and Sales.
The rand's initial weakness on Monday morning does not represent a fair assessment of where it should be trading, they added.
However, the local currency has been relatively badly hit, losing 7.5% since last Monday, making it the worst-performing currency after the Turkish lira itself (-23%).
The rand briefly hit R15.70/$ on Monday morning.
Speaking to Fin24 via email, RMB's John Cairns and Kim Silberman said "the rand weakness does feel overdone".
"While the rand is usually one of the worst-hit currencies in such periods of risk, its weakness still seems out of line with those of other emerging market risk currencies," they said, noting that over the same period, the Argentinian peso has lost 5.4%, the Mexican peso 3.75%, and the Brazilian real – which often competes with the rand as the world’s most risk-sensitive currency – only 2.3%.
"The under-performance must/will be attributed to local issues, but while there are enough problems to which to allude, the rand weakness does feel overdone," they said.
The morning's initial rand weakness came in very early Asian trade – at around 1:30 SA time, when liquidity would have been extremely thin. "As such, these moves do not represent a fair assessment of where the rand should be trading," they argued. "Asian trade has often seen a very sharp rand overreaction. Think Nenegate, when much was made about a brief rand spike [to R17.80/$] in January 2016."
Honeymoon is over
There was cause for concern, however.
According to Cairns and Silberman, the rand's movements are likely to be influenced by further bouts of risk aversion caused by Turkey, meaning action by Turkish authorities in an attempt to stabilise the lira will be important to watch. In Cairns and Silberman's view, Turkish authorities are unlikely to apply "tough medicine" in the form of rate hikes.
The rand weakness implies that it has pushed weaker than its long-term PPP (purchasing-power parity) fair value level, they said.
But it is also now close to the values of other high-risk currencies measured on the same basis, meaning its outperformance in the early part of the year has been worked away.
It also means the rand's "Ramaphoria honeymoon is over", they said, with current nominal levels on the rand similar to those seen before December's ANC National Conference in 2017.
"As noted, the rand is again trading as a high beta (risk-sensitive) currency – a contrast to early this year," they explained.
To hike or not to hike?
The rand's weakness will be inflationary, they predicted, but unlikely to force the SA Reserve Bank's hand.
"There are, however, some risks to hikes," they said. "Our view is based on our expectation that because nothing has fundamentally changed globally or locally the rand will retrace its sell-off.
"We are also of the view that unlike the Central Bank of Turkey, the SARB has hard-won credibility, which limits the extent to which sell-offs in the currency are sustained - unless they are fundamentally driven."
If the USD/ZAR spiralled out of control again this week and remained closer to R15.00/$, the SARB may eventually be forced to take action, but this was unlikely, they believed.
Volatility
Volatility has jumped following the weakness, they said, with the rand now pricing extreme short-term volatility and higher-than-normal volatility over the next few months – even the next year.
Three-month volatility is at 22%, against the long-term average of around 16%, they noted, with a much stronger probability of sharp rand weakness than sharp rand strength.
Big questions
"Looking ahead, from a short-term perspective, the key question is whether current contagion becomes self-fulfilling, with fear generating more fear and further sell-offs to an extent that weakness in a broad enough basket of risk assets starts to affect the real economy. We believe that this is unlikely," they said.
A bigger question, they added, was why the Turkish lira reacted so violently to US President Donald Trump's tariff threats. "Put differently, is Turkey a leading indicator of underlying structural problems with the global economy?
"There is a risk that Turkey is a symptom of global imbalances built up over a decade of abnormally low interest rates and quantitative easing," they said.
"The question closer to home is the extent to which this applies to South Africa."
The RMB research team's "initial take", they said, was that for now there was no need to change the view that the majority of trade for the rest of the year would be concentrated in the R13.00 – R14.00 range, i.e. that the rand would "pull back".
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