The rand’s recent strength has left it “overstretched”, Merrill Lynch South African economist Nazmeera Moola said in the firm’s latest overview of the South African economy.
Merrill Lynch has been consistently more bullish than the consensus on the rand’s prospects this year based on a weakening in the United States dollar and consequent rising commodity prices in US dollar terms.
Gold is currently trading above $400 an ounce from $325 a year ago and $275 two years ago, while platinum reached a 23-year high of $803,50 an ounce on December 8 from $600 a year ago and $450 two years ago.
“On a short-term basis, we see room for mild rand weakness. We think that the currency’s sharp appreciation against all the major currencies — including the Australian dollar — in recent weeks without any obvious underpin has left it slightly overstretched. Therefore, a rand at R6,65 per US dollar in the next six weeks is very possible,” Moola said.
The rand reached this year’s best level of R6,09 per dollar on December 3 from R7,07 on November 7.
The real effective trade-weighted rand has gained about 20% since the South African Reserve Bank (SARB) announced it first interest rate cut this year in June and is at its strongest level since 1995.
Merrill Lynch’s latest forecast is for a year-end dollar-rand exchange rate of R6,65 per dollar compared with their August forecast of 7 and a best level next year near 6 from August’s R6,80 per dollar before an easing to a 2004-year-end rate of R6,90 from August’s R7,50.
This is largely based on the dollar weakening to $1,33 per euro from the current $1,22 per euro. The rand-euro rate, which after all is the most important single currency in terms of trade weights, is forecast to be R8,39 (August R8,75) at the end of this year from the current R7,82 and a 2004-year end rate of R9,18 (August R9,98) per euro.
In December 2001, the rand reached a record worst level of R13,86 per dollar, R20.0866 per pound and R12,4790 per euro. It finished 2002 at R8,59 per dollar, as the rand was the best performing currency against the US dollar in 2002.
“Commodity prices are the key drivers of the rand and with platinum at 23-year highs and gold at the best level since 1996, it is no wonder that the rand is strong,” Moola said.
Moola expects the current account deficit to average 1,1% of GDP this year and next year from a 0,3% surplus last year, as she believes that capital goods imports will slow markedly next year, while the terms of trade are likely to continue improving in South Africa’s favour.
Although the terms of trade have improved markedly since the beginning of 2002, it is still well below the heights reached during the 1960s and 1970s.
“The downside of a stronger rand is that we have a below-consensus forecast for GDP growth of 1,8% this year and 2,5% next year. The recent interest rate cuts — substantial though they have been — have come too late. We think the consensus is underestimating the time it takes for lower interest rates to impact on real economic activity,” Moola concluded. — I-Net Bridge