There seems to be some good news for South Africa’s embattled economy in HSBC’s latest Currency Outlook report, which predicts some rand strengthening next year.
It suggests that waning US dollar dominance in 2023 could lead to the South African rand’s outperformance, as the currency has many positive idiosyncrasies.
While South Africa has had to contend with energy, floods, and social and political tensions, the rand’s depreciation has been mostly driven by external forces.
According to the report, covered by news portal MyBroadband Daily, the strong US dollar, the risks of global recession weighing on commodity prices, and the risk-off mode of global markets have been powerful forces driving the US dollar/rand higher in most of 2022.
“In 2023, our conviction is that the US dollar will be less dominant, and the rand will be able to benefit more from some of its peculiarities,” the bank said.
“We believe that South Africa’s relatively low inflation compared to many developed and emerging market economies has been largely overlooked by markets so far.
“From a valuation standpoint, HSBC’s metrics suggest that either the rand weakness is already excessive or has largely reflected the deterioration of some macro fundamentals.”
From a valuation standpoint, HSBC’s metrics suggest that either the rand weakness is already excessive or has largely reflected the deterioration of some macro fundamentals.
The rand, it believes, is undervalued from a purchasing power parity perspective, which relates to the earlier point of a relatively moderate inflation versus main trading partners.
The prediction? The currency could strengthen to R16/USD by the end of 2023.
