South Africa's rand to weaken in volatile trade this year

JOHANNESBURG: South Africa's rand will lose over 3 percent of its value in volatile trade against the dollar this year, a Reuters poll of market strategists found on Wednesday, but should be cushioned by wavering expectations for U.S. interest rates.

The health of the world's two biggest economies - the United States and China - has been thrown into question in recent months as the two battle each other over trade, injecting new uncertainty over how high U.S. interest rates will go.

This has rattled emerging market currencies like the rand, while equity markets around the world have mostly tumbled since October on fears of a global economic slowdown.

Last month's Reuters survey of 40 strategists suggested the rand would slide to 14.27 per dollar in just a year's time.

In a poll of the strategists taken in the past week, the rand is expected to weaken over 3 percent to 14.43 against the dollar towards the end of this year, from just under 14 per greenback now.

That is a modest move compared with the range it traded in last year - from around 11.50 per dollar in February to over 15.69 in early September.

Forecasts for end-2019 were also in a fairly wide range, from 12.63 to 16.50.

"While the rand has reached 13.86 per dollar in these first few days of 2019 already, its path is likely to remain volatile, running off risk sentiment," wrote Investec chief economist Annabel Bishop in a note.

Market volatility reared its head again last month after part of the U.S. Treasury yield curve inverted, raising worries whether it is now signalling an oncoming recession as it has reliably done in the past.

The Fed raised rates four times in 2018, including in December, when policymakers' own forecasts shifted down to show two more coming this year, from three predicted previously.

Financial market pricing at the moment is at odds with policymakers' judgment. During the worst of equity market selling around the turn of the year, U.S. interest rate futures began to partly price in an interest rate cut late in 2019.

The South African Reserve Bank, for its part, is expected to hike the repo rate by a quarter of a percent to 7 percent in May, according to a Reuters survey last month, around the time the country is due to hold a national election.

But that isn't likely to do much to prop up the rand.

The SARB increased its benchmark lending rate two months ago for the first time in nearly three years, saying the risk of higher inflation in the longer-term remained elevated and that it could not chance waiting until later to take action.

"In a nutshell, a combination of weaker global growth in 2019 and a lack of real domestic reform momentum, even after the elections, should keep the rand at a level that is somewhat undervalued," said Hugo Pienaar, economist at the Bureau for Economic Research.

A recent Reuters poll showed economists are forecasting just 1.5 percent growth this year, one of the weakest expected growth rates among emerging market economies.