/ 10 January 2011

A rand turnaround would be dramatic

With large asset managers such as Allan Gray and Coronation taking major bets against the currency, many investors will be watching the rand’s movements with interest. Below is an update from Investec on the rand’s outlook and the message is that the rand is anyone’s guess, but any weakness would be severe. So, unless you are a betting investor, it makes sense to hedge your bets.

Annabel Bishop, Investec Group Economics

  • We continue to believe sovereign debt contagion is the single biggest risk for the rand in 2011. The fallout could be larger than before, meaning the rand could weaken substantially on the sudden outflow of foreign investments due to heightened levels of risk aversion. (This is not our central view, merely a risk scenario, although one we believe has a high probability given the pertinent issues of the heavily indebted eurozone).
  • The resurgence of sovereign debt contagion could occur as early as the end of the first quarter or in the second quarter, although January is also risky. The March to May period sees the rollover of sovereign debt for many of the advanced economies at risk of bankruptcy, while January tends to see a high degree of bond issuance as governments front load sales.
  • A second risk scenario for the rand is that the euro continues to weaken on the woes of the eurozone, but severe sovereign debt contagion is avoided as in 2010, and the rand strengthens further as a result.

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