The rand has stabilised somewhat in early 2022 after two months of relatively sharp depreciation, but is set to face more turbulence in 2022, says Nedbank.
In a research note on Tuesday (11 January), the bank noted that South Africa was particularly hard hit by the omicron scare because local scientists were the first to identify and sound the alarm on the new variant. This led to an avalanche of travel bans on the country.
“Although most of these bans were gradually lifted, they nonetheless weighed on sentiment and the country’s growth prospects. The rand’s pullback over January reflected some correction and expectations that the South African Reserve Bank (SARB) would tighten monetary policy more aggressively, starting later this month.”
“The scene is set for a volatile year. Global risk appetites will probably become more choppy, sensitive to the threat posed by a mutating virus, rising global inflation, and higher US interest rate expectations. These uncertainties are likely to subdue risk appetites for emerging market assets, weighing on the rand.”
Weaker commodity prices and a reversal in the trade balance will add further downward pressure, the bank said, adding that it expects the local currency to depreciate moderately during 2022.
Global risk appetites are likely to become more erratic as the world economy grapples with sticky inflation, a mutating virus, divergent vaccination rates and a tricky withdrawal of monetary and fiscal stimulus in advanced countries, Nedbank said.
“The US and other developed countries will probably normalise monetary policies faster than most analysts assumed for much of last year. This will tend to support the dollar while weighing on emerging market currencies.
“Finally, commodity prices will also trend lower as China faces more significant downside risks from the weakness in its property market and the drive to shift its economy towards higher value-added manufacturing and services,” Nedbank said.
It added that the boost provided to rand by a large trade and current account surplus is expected to fade and ultimately reverse.
“Although the rand is currently around 7% undervalued based on purchasing power parity alone, it continues to trade at a considerable premium to our proxy of emerging market risk appetites. We, therefore, expect the rand to depreciate moderately, with downside risks, throughout 2022.”
The below table shows Nedbank’s monthly exchange rate forecasts for the coming year.
On Wednesday (12 January), the rand was trading at the following levels again the major currencies:
- Dollar/Rand: R15.48 (-0.24%)
- Pound/Rand: R21.10 (-0.28%)
- Euro/Rand: R17.59 (-0.32%)