In the past few months the South African rand has fared well. It appreciated around 5% against the USD in the past three months. The rand is expected to strengthen in line with rebounding prices of commodity and better risk sentiment towards EM currencies. It continues to be undervalued, while the outlook of global economic growth should continue to rebound, underpinning a lower USD/ZAR in the medium to longer term.

But the rand continues to be susceptible to the trends in commodity price, political uncertainties and general risk sentiment. These factors will continue to “pose risks of a sharp move higher in USD/ZAR near term”, according to Nordea Bank Research.

The currency is quite correlated with commodity prices’ performance. Recently, commodity prices, particularly oil prices, appear to have mainly driven a general risk sentiment. Commodity prices are expected to rebound from now. However, it is clear that subdued commodity prices will threaten renewed depreciation of the rand in the near term.

Meanwhile, in the past few months there have been news about scandals with regard to President Zuma. Also the confidence in the President has been quite low. There is quite an uncertainty regarding Zuma’s political future despite him surviving an impeachment vote in April.

The South African rand had declined sharply in December after the President dismissed the then Finance Minister Nhlanhla Nene and appointed David van Rooyen as the new Finance Minister. The ZAR is likely to remain vulnerable to negative political news that might result in extreme moves because of thin liquidity.

“Economic activity has slowed as a result of softer commodity prices and power constraints, and we expect growth around 0.5% this year”, said Nordea Bank.

The South African economy is expected to continue to be weak. Hence there are increased worries that the government will be unable to attain its budget targets. There is a heightened risk that S&P might lower South Africa’s rating to junk by June. Even if markets have already factored in that risk, huge portfolio outflows because of the junk rating is a major threat to the rand.

“We continue to look for a stronger ZAR in the medium term in line with improving commodity prices, an improving global growth outlook and better risk sentiment”, noted Nordea Bank.

The material has been provided by InstaForex Company –