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Umpteen number of reasons why we are bearish on ZAR, in outright trades, we are long USDZAR and short ZAR/RUB.
Following the peak in political tensions in the second half of August, political noise has subsided and the rand has rallied around 6% against the dollar. However, we believe this recent ZAR strength is unsustainable, with some of this outperformance attributable to temporary M&A flows.
We remain bearish the rand, based on the need for a higher political risk premium, anemic domestic growth prospects, stretched valuations and continued weak BoP.
Political risks remain an important driver of the currency, and the potential for a flare-up in tensions can weigh on ZAR.
While political headline noise has recently subsided, underlying risks remain. The Hawks’ investigation of Finance Minister Gordhan is ongoing, and we expect factionalism and tension around SOEs, the nuclear program, and personnel to periodically reappear, particularly with the 2017 ANC elective conference in sight.
The forecasts of S&P downgrades in South Africa by year-end, and Fitch is also likely to place South Africa on negative watch.
Economic momentum should slow after a rebound in 2Q16. Following the strong GDP rebound in Q2’16 (3.3% QoQ SAAR), our economists expect growth to slow to -0.6% QoQ SAAR in Q3’16 and 1.0% QoQ SAAR in Q4’16. While PMI showed an uptick in September, the SACCI Business Confidence Index remains at multi-year lows, and SARB Governor Kganyago has expressed concern that South Africa's 'underlying economy' remains weak.
ZAR valuations look stretched. The rand is screening rich on our short-term model of CDS and platinum prices. Poor BoP fundamentals are likely to weigh on medium-term ZAR valuations.
