Since the US interest rate hike in December 2015, the South African Rand has been volatile, rising and falling by almost 8% and is currently flat on a year to date basis. With the US central bank officials now in support of another interest rate hike anytime this summer, the question is where the rand goes from here.

Despite the pessimistic outlook, with the Standard&Poor’s credit rating decision due on 3rd June 2016, the longer term prospects point to the South African Rand appreciating in value against the US dollar. This article takes a look at the current interest rate landscape in the US and also outlines the currency forecasts for the South African rand into Q1 2017.

Earlier in April, the US Federal Reserve’s meeting minutes surprised investors as the report showed that many policy makers were in support of an interest rate hike. Since then, many officials have come out openly in support of another interest rate hike. While investors are still unsure on when the next US interest rate hike will come, some speculate that it could be anytime in June or July. Or as the Federal Reserve governor says, “a summer rate hike.” With the US economy rebounding in the second quarter and largely supportive of the rate hike view, it is now a matter of ‘when’ and not ‘if.’ This begs the question on the impact of another US rate hike will have on the South African Rand.

The US Federal Reserve hiked interest rate in December of 2015. Since then, the South African Rand or ZAR has seen a volatile ride and is currently up a mere 0.60% on a year to date basis. But of course, the rand weakened by almost 8.80% in the early part of this year before strengthening by another 8.80%. With the next installment of the US rate hike on the way, the question is whether the rand will continue to rise or fall?

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US Dollar v/s South African Rand – Year to date performance (Source: WSJ.com)

The rand has been on a weakening spree since early May. In fact since May, the rand has fallen 9.54%. The declines in the currency came as the US dollar continued to strengthen on rising expectations of another rate hike. Looking ahead, the Federal Reserve will be meeting on June 14 – 15 which could no doubt put the rand under pressure. But there could be some respite if the Fed manages to hold off a rate hike and perhaps postpone it towards July, or maybe even August.

It is rather interesting to note that in the broader scale of things, a US rate hike is in fact a blessing in disguise, as the US dollar is known to historically weaken after a rate hike. For investors, this could provide a near-medium term buying opportunity in the Rand, against the US dollar. In terms of interest rate differentials, the interest rate at 7% is still an attractive proposition. The South African Reserve Bank or SARB left interest rates unchanged at 7% at its meeting on May 19th, 2016.

Most recently, the SARB Governor Lesetja Kganyago said that with the country hit by drought and bleak economic prospects (Standard&Poors has warned that South African’s credit rating could be downgraded to Junk status), the central bank was committed to containing inflation, which is currently recorded at 6.20%. In the last meeting, the SARB cut the 2016 growth forecasts to 0.60%, noting that “The South African Reserve Bank is certain that an environment of consistently low and stable inflation is the best contribution it can make to a balanced and sustainable growth.”

While the near term risks remains, technical forecasts for the South African rand shows that the markets could be looking at a period of the rand appreciating in the medium – long term. The expectations being that the US dollar could weaken by as much as 11ZAR by the end of the year – Q1 2017.

South African Rand – Forecasts

Q2 – 2016

Q3 – 2016

Q4 – 2016

Q1 2017

USDZAR*

15.50ZAR

14.00ZAR

13.00ZAR

11.00ZAR

*1 US Dollar

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