Currency forecasts and the value thereof
Opinion piece by Andre Botha – Senior Dealer at TreasuryONE
One way to gauge the outlook for the rand is to examine whether bank rand forecasts change over time. The obvious answer is, of course, but we need to understand what the reasons are. So with this in mind, we (TreasuryONE) decided to plot a couple of bank forecasts for the end of the year to see whether there is a material change in forecasts as we head towards the end of the year.
The opinions expressed in relation to reasons for forecast changes is that of TreasuryONE.
From the off, it is easy to see that most banks have kept their forecasts steady from May to June 2021 except Standard Bank and ABSA.
Some of the main reasons for banks keeping their forecasts the same may be that:
1) The terms of trade is still positive, meaning banks are still expecting that the supply of the dollar will outweigh the demand for the dollar, thus driving the rand lower.
2) The overall feeling that the rand is still a beacon of yield in a low yield environment will still help the rand in the longer term.
In our opinion, the most significant change in Standard Bank’s forecast is most likely related to the size of the terms of trade currently in the market. They appear to expect the decrease to be less than initially thought and also that commodities will lose some shine in the second half of the year.
Absa also changed their forecasts from R15.25 to R13.75, a significant change in thought from them. In our view, the change is mostly related to their view that terms of trade will still keep the rand stronger for longer and that the world economy will drag a bit, which will keep the demand side of the economy in South Africa suppressed.
Both Goldman and Nedbank appear to have differing views on where rand strength is emanating from. It appears that Nedbank’s view is that the rand is moving on its own as the Dollar index is at the same level as at the beginning of the year when the rand was R15.00. Therefore, it is our view that they conclude that the above mentioned factors have caused rand strength.
While also acknowledging the above factors, in our opinion, Goldman is more in the camp of US dollar weakness, attributing to more of the rand strength than a rand only movement. Nevertheless, they are bearish on the US dollar going forward because they expect the US Fed to stay mute on possible taper talks and the US economy sluggish recovery post the pandemic.