USD/ZAR may rebound near-term to 12.75 before falling further - Danske Bank

According to analysts from Danske Bank, the Rand is not as undervalued as before at current levels, which will limit the improvement in South Africa external balance.

Key Quotes: 

"The South African (SA) economy is still experiencing a modest recovery; le,in Q3, the economy grew 0.8% y/y in line with consensus. The rebound is driven mainly by agriculture, which is recovering from a severe drought, and also by mining. However, manufacturing and services sector activity remains subdued. The rebound in the economy comes amid improving confidence among corporates and households. However, retail sales growth slowed to 3.2% in October from an average of over 5% in Q2, pointing to weaker consumption growth in Q4. Although the PMI has increased, the indicator remains below the 50 benchmark. Leading indicators, however, do paint a somewhat brighter picture.”

“The ANC leadership change will lead to stronger growth prospects for the South African economy, we will have to see concrete policy changes to assess the growth impact. We revise upward our forecast (also in light of the Q3 and solid leading indicators) moderately, projecting real GDP to grow by 0.9% (previously 0.7%) in 2017 and 1.9% (previously 1.5%) and 2.2% in 2018 and 2019, respectively, both slightly above Bloomberg consensus.”

“The South African Reserve Bank (SARB) kept its benchmark repo rate unchanged at 6.75% at the 23 November meeting, against our expectations. Inflation has been below 5% since July, i.e. safely within the central bank’s 3-6% inflation band. With the election of Cyril Ramaphosa and the stronger ZAR, we think the SARB will be able to lower its repo rate by 25bp at the March meeting.”

“The sharp downward move in the USD/ZAR on the election of Cyril Ramaphosa as new ANC leader is a little overdone in our view. We basically see a challenging transition from Jacob Zuma to Cyril Ramaphosa, which will involve some policy uncertainty nearterm. At the current level, the Rand is not as undervalued as before, which will limit the improvement in the external balance. Hence we think the USD/ZAR may rebound a bit near-term to around 12.75 in 3M before falling further as the new leader are able to instil his policy agenda, implying the USD/ZAR will fall to 12.50 in 6M and 12.25 in 12M.”