Executive Summary

·        The stronger US dollar has rung alarm bells in financial markets – the US Dollar has gained 5% since mid-February 2018 as the US Federal Reserve reverses quantitative easing and signals a series of staccato rate rises. The dramatic comeback in the US dollar has led to a slump in emerging market currencies, with the South African rand erasing its gains of the past three months.

·        The US dollar is a barometer for the changing global liquidity environment. A stronger US dollar is a reflection of tighter global financial conditions, which is not conducive for risk-assets. On the flipside, a weaker US dollar is a reflection of easier global financial conditions and bodes well for the performance of risk-assets like the rand.

·        Our 1H18 and 2H18 forecasts for the rand are R12.45 and R13.00 respectively, which is more bearish than the Bloomberg consensus view (i.e. R12.22 for 1H18 and R12.09 for 2H18).

·        The reason for our ‘out-of-line’ forecast for the rand is due to our long-held view (i.e. since the start of 2018) that the US dollar would strengthen amid a number of global liquidity tailwinds that are losing momentum (which would dampen the outlook for risk-assets like the rand). Our view is now materializing, but we must admit that we are surprised by the speed at which it is taking place. We expect this trend to continue as the year progresses. Our target level on the US dollar index is 95 points, which is equivalent to €1.15/$ – hence our bearish forecast for the rand.

·        On the local front, we expect the SARB to leave interest rates unchanged, albeit with a hawkish statement (amid the rise in long-term US interest rates, higher rand-oil prices, and a more volatile emerging market environment). We believe that the rand will continue to trade in-line with the international environment. We leave open the possibility that the US dollar could consolidate in the near-term, in which case we could see the rand pull back to R12.30.

·        Short-term, we recommend keeping an eye on support at R12.23 and resistance at R12.93 (see our latest Technical Strategy note: Short-term Charts: Major Assets” of 16 May 2018 for a more detailed technical view on the currency).