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Is the rand overvalued?
The rand is fast approaching its 14 months high this morning as the currency shows consistent strength today. This as risk appetite globally and positive local retail sales data boosted demand for the currency. Then rand is currently at R14.30 against the US dollar, just 10 cents above its target for the 14 month high. Investec Chief Economist, Annabel Bishop joins CNBC Africa for more.
Thu, 15 Apr 2021 11:10:33 GMT
Disclaimer: The following content is generated automatically by a GPT AI and may not be accurate. To verify the details, please watch the video
AI Generated Summary
- The rand's impressive performance is driven by global risk appetite and positive local data, but sustainability remains uncertain due to market volatility.
- Inflation rates and interest rate expectations pose risks to the rand's continued strength, with potential weaknesses on the horizon.
- Market exuberance, potential credit rating downgrades, and uncertainties surrounding foreign investment flows contribute to the rand's short-term overvaluation and long-term undervaluation.
The South African rand is fast approaching its 14-month high, trading at 14.30 against the US dollar, just 10 cents short of its target. The currency has shown remarkable strength recently, benefiting from a positive global risk appetite and strong local retail sales data. Annabel Bishop, Chief Economist at Investec, shared her insights on the current outlook for the rand during an interview with CNBC Africa.
Bishop mentioned that while the current level of the rand is impressive, it may not be sustainable in the long term. Global financial markets are volatile, and investor sentiment towards risky assets is driving demand for emerging market currencies like the rand. South Africa's relatively attractive interest rate return compared to other emerging markets has positioned the rand as a leader in the currency basket.
One of the key factors supporting the rand's strength is the current inflation rate of 2.9% and money market rates at 3.5%, offering good real interest rates. However, Bishop highlighted the risks of potential inflation increases and the impact they could have on the currency. A rise in inflation towards 5% by the end of the year, coupled with minimal expected interest rate hikes from the Reserve Bank, could result in some weakness for the rand.
The interview also delved into the impact of the vaccine rollout, inflation expectations, and global market dynamics on the currency's future performance. Bishop cautioned that market exuberance and the looming risk of credit rating downgrades for South Africa in May could introduce volatility and weaken the rand in the coming months.
While the rand may be considered overvalued in the short term due to its rapid appreciation, Bishop noted that on a longer-term basis, the currency is undervalued according to purchasing power parity metrics. She suggested that the rand could target 14 to the dollar in the near future, but volatility could easily push it back to 15. The flow of foreign investment into South African bonds and equities, driven by attractive returns, also played a role in supporting the rand.
In conclusion, Bishop acknowledged the uncertainties surrounding the rand's future trajectory, including the potential impact of power cuts and a third wave of the pandemic. Despite the current strength of the currency, its direction remains highly dependent on various internal and external factors that could influence its performance in the coming months.
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