South African Rand Outlook – (1-3 Months) Better trade

First quarter unemployment data released on May 26 was the highest in almost a decade. Unemployment reached a whopping 26.4%, against 24.8% for the consensus. South Africa continues to suffer from power outages. It will take several years before the national grid is expanded by the 20-30% additional supply expected to keep Eskom from imposing sporadic outages, says RBC Capital Markets. These outages have been keeping activity growth subdued and may well trigger stagflation later this year. GDP data does not seem to be as grim as in late 2013 but also does not seem to be drifting anywhere near the pre-crisis boom years. 

Trade has improved following a meaningful period of rand undervaluation. It is too early to assess whether currency weakness is finally having an impact on the external accounts. Nevertheless, our RBC-POLAR valuation framework does show that the rand is one of the most undervalued currencies in EM. This, added to still high real interest rates, should anchor the rand into next year. RBC Capital Markets assumes the rand will gradually appreciate to below 11.00 later this year. This is on the back of real interest rates and hopes that stresses could push the current administration to initiate reforms and support the currency. 

The new DA leadership will likely raise hopes of a meaningful opposition to the ANC ruling, prevailing since the end of the Apartheid. Analysts feel confident that Mmusi Maimane will form a strong opposition to the ANC.