Executive Summary

·        Since the start of the year our view has been that the rand would gradually weaken (or rather that the dollar would strengthen) towards the 12.50 level by mid-year, and to around 13.00 by year-end. We continue to hold this view.

·        Should EM capital flows reverse, the risk is that the reversal results in major currency weakness. This could push the rand out beyond our target of 12.50 for mid-year and 13.00 for year-end. In fact, the SARB’s May 2018 MPC statement highlighted this risk and started with the statement “higher US long-bond yields have led to sharply lower capital flows to emerging markets”.

·        That said, the rand has managed to contain contagion risk that has arisen in other struggling EMs (e.g. Turkey) relatively well, albeit with bouts of volatility. During Q&A at the MPC meeting, the governor indicated that the SARB does not think that current global developments will see a repeat of the ‘Taper Tantrum’ seen in 2013, providing some indication that the SARB remains comfortable that these upside risks will remain contained.

·        As base case, we share the governor’s view, and this is one reason why rand weakness (and our expectation of rand weakness into year-end) may seem moderate in the face of external headwinds.

·        We believe two factors in particular should provide support for the rand in an otherwise increasingly hostile external environment (compared to, for example, 2013). Firstly, South Africa’s long bond real yields better reflect the country’s external vulnerability and secondly the slope of the yield curve is quite steep.

·        Short-term, we recommend keeping an eye on support at R12.23 and resistance at R12.93 (see our latest Technical Strategy note: Rand correction phase unfolding, but not for long” of 24 May 2018 for a more detailed technical view on the currency).