Bank of America (BofA) analysts believe the South African Rand (ZAR) is significantly undervalued. They predict a potential appreciation of the currency against a stabilizing US dollar. The analysis is rooted in expectations of higher real GDP growth for South Africa, alongside a single interest rate cut by the South African Reserve Bank (SARB) in January.
BofA has revised its estimate for real GDP growth for South Africa to 1.6%, down slightly from the previous forecast of 1.8% but still a notable improvement from growth of less than 1% in the past two years. Inflation is expected to average 4.3% in 2025, which is below the SARB’s target of 4.5%.
Despite global risks, BofA forecasts that the central bank will cut the policy rate to 7.50% in January and maintain it for most of 2025. The cumulative rate cut cycle is expected to be 75 basis points. However, analysts also foresee a rate hike at the last meeting of 2025 as inflation is expected to rise above target.
The bank’s analysis shows that the current value of the ZAR is not in line with economic fundamentals, and that there is potential for significant appreciation. Furthermore, positioning on the currency is considered light, indicating that not many investors are betting on the Rand, which could lead to a sharper rally if the broader USD starts to stabilize.
Furthermore, BofA believes that the front-end swaps are too low and that the 5- and 10-year yields are too high compared to their macroeconomic forecasts. This discrepancy is expected to result in a flattening of the yield curve. It was also noted that asset swap spreads (ASWs) have tightened excessively as South Africa’s budget outlook has not improved substantially over the past three years.
In summary, BofA’s analysis presents a constructive outlook for the South African Rand, supported by favorable economic forecasts and an expected rate cut by the SARB. The bank’s findings point to possible adjustments in financial markets as the currency aligns with macroeconomic reality.
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