RMB forecasts rand/dollar at 7

Rand Merchant Bank believes that persistent currency gains could prove challenging.

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Rand Merchant Bank, a division of FirstRand Bank (FSR), believes that persistent currency gains could prove challenging, “particularly as core economies undertake monetary policy tightening to contain growing inflationary pressures”.

RMB said it would continue to advocate a rand rate of 7.00 against the greenback at year-end.

“The rand's performance over the first quarter of 2011, during which 17.4 billion rand worth of local bonds were sold, suggests that the currency could withstand a moderation in speculative flows without weakening drastically. We therefore remain confident in our dollar/rand view for year-end,” it said.

RMB said that monetary policy tightening could have implications for global liquidity and carry-trade opportunities in the longer term, limiting rand gains.

The group noted that the dollar/rand's short-term correlation with the euro/dollar had strengthened considerably over the last month as both currency pairs were steered by risk sentiment. “The correlation should hold owing to broad-based US dollar weakness, but we could see a divergence closer to the next European Central Bank policy meeting, as lofty interest rate expectations generate euro strength,” it said.

The financial services group pointed out that the relationship between the Dow Jones and the dollar/rand broke down slightly in April as corporate earnings season in the US failed to inspire purchases of dollar-denominated assets. “If anything, political wrangling between the White House and Republicans over budget proposals heightened disquiet among investors, discouraging long-dollar trades. Equities proved to be exceptionally volatile as a result, while the dollar/rand held a firm range,” RMB said.

It added that, although peripheral debt woes had resurfaced, possibly inciting a slight aversion to riskier assets, confirmation that China's economy had maintained a strong growth momentum was likely to subdue fears of slowing global growth. “This should provide support to commodity currencies, including the rand. While geopolitical uncertainty in the Middle East and north Africa region and European sovereign debt concerns will continue to weigh on short-term sentiment, developments in China are likely to underpin long-term growth expectations and temper market volatility. This is perhaps a contributing factor to the dollar/rand's magnetism to the 6.80 levels,” the group said.

RMB said its economists expected the SA Reserve Bank (SARB) to keep rates unchanged until November. “Given our rand forecasts of the dollar/rand at 7.00 and the euro/rand at 9.00 at the end of the year, the SARB will find it difficult to hike rates aggressively as rand strength is keeping monetary conditions tight. Hence we think the initial phase of the cycle will be to remove policy accommodation rather than explicitly tighten policy. The main risks for rate hikes earlier than November include further increases in commodity prices, earlier policy normalisation in the US and stronger price pass-through by local companies,” the groups aid.

RMB noted that the dollar/rand consensus forecasts appeared to understate rand volatility. The local unit has strengthened 2.7% since January. “This seems rather insignificant if we consider that the dollar/rand has a tendency to weaken by almost 10% in a day in times of immense stress. But we have not seen an intraday move of that magnitude since 2008 and are perhaps adjusting to a new norm, in which a 1%-2% move in the dollar/rand is a noteworthy event,” RMB said.

By 11:00 local time, the rand traded at 6.72 against the dollar. - I-Net Bridge

Source: http://www.iol.co.za/rmb-forecasts-rand-dollar-at-7-1.1060247

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