Rand weakness ‘inevitable’, says Commerzbank economist

The commodity price slump is hitting the South African rand more than most currencies

South Africa’s rand, or ZAR, is certain to fall according to Peter Kinsella, head of research on emerging market economies and currencies at Commerzbank.

“The combination of commodity price declines, a widening current account deficit and higher expected inflation implies that further ZAR weakness is inevitable,” he writes.

Kinsella argues that the ongoing commodity price slump affects the rand more than most currencies. “As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” he writes.

Moreover, South Africa persistently runs a sizeable current account deficit, which is expected to widen towards 4.5% of GDP over the coming quarters. “This makes South Africa and ZAR vulnerable to an increase in external financing costs, which is exactly what manifests at present with higher US interest rates,” he writes.

“In the event of materially higher US interest rates, this poses a key risk for ZAR. In addition to this, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests,” he adds.

As for the country’s central bank, the South African Reserve Bank, it surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive, writes Kinsella.

South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months. The only risk to the above scenario is if the Fed takes note of the current emerging market jitters and refrains from hiking rates over the coming months. This could lead to some brief respite for ZAR. We illustrate a strategy which will protect investors’ interests in both cases.”

Kinsella’s recommendation is a “forward plus” in the euro/rand currency cross. “ZAR buyers are hedged at current spot prices and benefit if EUR/ZAR appreciates towards 19.00,” he writes.

The cross rate was trading at 17.3890 at midday on Friday.

This post previously appeared on news.markets: https://news.markets/forex/rand-weakness-inevitable-says-commerzbank-economist-8092/

 

Bank of America names its top emerging picks for 2016

The year 2016 isn’t very old but it already looks as though prediction is a game for the very brave. Chinese shares have already chalked up two days of plunge and shutdown; there’s new froideur between Saudi Arabia and Iran; and it seems very possible that North Korea has a thermonuclear weapon we didn’t know about.

Still, the foretelling goes on, with Bank of America Merrill Lynch latest into the fray with its top emerging market calls for this year.

“Our top trades for 2016 look to take advantage of monetary policy divergence within developed markets, between DM and EM, and within EM,” the bank’s analysts write.

“We are cautious on the return outlook given risks of a faster Federal Reserve (monetary) tightening, a sharper Chinese slowdown, volatile oil prices and US high-yield unraveling,” they go on.

Its not likely to be a blockbuster year though, with forecast returns of 1% for local EM debt, -0.4% for over all EM foreign exchange and 2.7% for EM’s external sovereign debt.

So, here’s the list:

BoAML’s top foreign exchange pick is to be long both Mexico’s peso and Poland’s zloty against the euro, while being short a basket of Korean won, Malaysian ringgit against the dollar, and South Africa’s rand against the rouble – all on the basis of monetary policy divergence.

The bank’s favourite local-debt long positions are in Russia, India and Brazil.

It prefers Russian paper to Turkish, fretting that, “the latest news on macro policy and constitutional changes” raises the risk that Turkey will be stripped of its investment-grade credit ratings.

Those who like Argentina’s chances under its new, more conciliatory and market-friendly administration might like to consider its EUR GDP warrants, perhaps hedged in currency terms in order to minimise exposure policy transition there. BoAML has raised Argentina to overweight thanks to the change in government.

However, events in China are clouding the outlook. Its the largest EM, after all, and its start to the year has been an epic, just not one that’s been fun to watch.

“We remain cautious amid renewed Chinese slowdown concerns and the global equity market rout,” the bank’s analysts conclude.

This article first appeared here: https://news.markets/bonds/bank-america-names-top-emerging-picks-2016-7901/