South Africa's rand will erase over half of September's gains against the dollar before 2016 is over as worries linger about a potential end-of-year sovereign credit downgrade to junk status, a Reuters poll found. The rand gained around 6 percent last month, supported by inflows into emerging markets as investors shrugged off concerns about domestic politics for much higher yield.
Still, the poll of 37 strategists and economists taken this week showed the rand is expected to hit 14.40 per dollar in December, more than 4 percent weaker than current levels of around 13.7750 per dollar. It will slip to 14.50 per greenback nine months later, the poll showed, less pessimistic than last month's median forecast of 15.31 per dollar.
"We expect a weaker trend later in the year given the strong probability of further political turmoil and persistent worries about further possible downgrades to South Africa's sovereign risk rating," said Johannes Khosa, a Nedbank economist. "An early and appropriate political resolution to the current crisis in South Africa would obviously lead to a strong pullback in the rand."
Recent expectations of fewer interest rate hikes in the United States has supported the rand. However, currency strategist John Cairns at Rand Merchant Bank in Johannesburg cautioned that the dollar could easily rise if the Federal Reserve hikes interest rates aggressively. The rand is one of the most liquid and highest-yielding emerging market currencies and been among the top performing currencies in the past six months. But it can also easily lead the pack of weakest currencies when risk appetite disappears.
The South African Reserve Bank is expected to hike rates by 25 basis points to 7.25 percent in January to support a vulnerable rand in an event of a December sovereign rating downgrade. Inflation is expected to average at a slower rate next year of 5.8 percent, down from 6.4 percent this year.
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