South African rand to hold most gains since start of 2018

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South Africa’s rand is expected to hold onto most of this year’s gains against the dollar, supported by improving domestic economic growth, as long as the U.S.-China tariff tussle does not disturb global trade flows.

A Reuters poll of 30 strategists taken April 3-5 showed the rand is expected to remain mostly resilient against the dollar, around 11.93/$ by end-September, and to slip slightly to 12.13/$ by this time next year.

The currency began the year at 12.40 per dollar.

“What has been driving our rand forecast is that the emerging market fundamental backdrop still looks strong, particularly the interest rate and growth differentials,” said Mike Keenan, strategist at Absa Capital. “That should help the rand sustain this year’s gains.”

But he said getting some clarity on how much further tensions between U.S. President Donald Trump‘s White House and China on trade will escalate is the wild card.

A back-and-forth dispute between the United States and China, the world’s two biggest economies, over free trade has triggered a market sell-off that has marred what is an otherwise a brighter economic and political outlook for South Africa.

South Africa’s economy grew more than anticipated at the end of last year, with growth expected to rise to 1.6 percent this year from 1.3 percent in calendar 2017.

The South African Reserve Bank cut interest rates by a quarter of a percent to 6.50 percent last month, but will likely keep them there through next year.

“That, coupled with strong equity inflows and an improving domestic growth outlook, underpins our constructive view on the currency,” added Absa Capital’s Keenan.

South Africa has been riding a wave of optimism since President Cyril Ramaphosa took office earlier this year, while the country withstood a credit rating downgrade by Moody’s late last month that could have triggered forced bond selling.

Last month’s survey had predicted the rand would weaken more than 4 percent in 12 months as investors start to take profits from an over-bought currency on doubts of how much Ramaphosa can achieve in implementing reforms.

Ramaphosa faces an uphill battle in revitalising growth and creating jobs in a country plagued with social inequality.