The South African rand, along with the Turkish lira, is among the most vulnerable currencies to a possible reversal in risk appetite among investors, according to international investment bank Lehman Brothers.
Investor sentiment could be tested after the upcoming release of United States inflation data, Lehman Brothers economist Tolga Ediz said in a recent research note.
According to Ediz, after the last federal open-market committee meeting statement and the US payrolls report, markets seem to have concluded that the US Federal Reserve will move to hike rates in 25-basis point clips, triggering a fall in the dollar and US Treasury yields.
Investors have started to put money to work in high-yielding currencies and risk appetite appears to be high — as measured by the group’s risk aversion and risk premium indices.
“Sentiment could be tested after the upcoming US inflation data,” Ediz stated. US producer price inflation is set for release on Thursday and consumer price data are scheduled for Friday.
“The rand and the Turkish lira are the most vulnerable to such a reversal. So far this year the rand has been immune from volatility in global markets, even appreciating when other emerging market currencies were tumbling during May and weathering the fall in commodity prices that pulled other commodity currencies lower,” Ediz observed. “These are tell-tale signs that the macroeconomic fundamentals support the rand.
“The $884-million increase in central bank reserves, bringing the total to $9,8-billion in June, is another positive sign. Indeed, the growth picture is looking more balanced and the outlook for exports has improved of late, suggesting that a sharp depreciation of the rand is unlikely.
“That said, we sense that the currency would be vulnerable to a rise in risk aversion. And we still see the rand as overvalued, although by less than the 10% to 15% that we had assumed before.
“Furthermore, the news flow could turn negative in the coming months, with higher inflation and issuance putting pressure on the bond market.”
Ediz concluded by saying Lehman Brothers is looking for a rise in the euro/rand exchange rate in the coming weeks. — I-Net Bridge