HSBC said waning US Dollar dominance in 2023 could lead to the South African rand’s outperformance, as the currency has many positive idiosyncrasies.
HSBC’s Currency Outlook report said while South Africa faces domestic challenges – energy, floods, social, and political tensions – the ZAR’s depreciation has been mostly driven by external forces in 2022.
The strong US Dollar, the risks of global recession weighing on commodity prices, and the risk-off mode of global markets have been powerful forces driving the USD-ZAR higher in most of 2022.
“In 2023, our conviction is that the US Dollar will be less dominant, and the rand will be able to benefit more from some of its peculiarities,” it said.
“We believe that South Africa’s relatively low inflation compared to many developed and emerging market economies has been largely overlooked by markets so far.”
HSBC added that the rand’s real rate dynamics will likely improve significantly and could turn positive to be one of the highest in the emerging markets space in 2023.
“With a less dominant US Dollar, we believe that the rand is likely to recoup some of its losses in 2023,” the bank said.
However, the deterioration of South Africa’s current account balance over the recent quarters raises some risk for the currency in 2023 if it were to continue.
HSBC believes that South Africa’s external position may display resilience as:
- The trade balance continues to be in surplus, albeit small.
- The terms of trade have stabilised at relatively high levels.
- The deficit of the income and services balances should moderate on fewer dividend outflows and normalisation of tourism revenues.
“Admittedly, much will depend on the global growth cycle and commodity prices, but we assume that the overall current account will be close to zero relative to GDP in 2023,” it said.
From a valuation standpoint, HSBC’s metrics suggest that either the rand weakness is already excessive or has largely reflected the deterioration of some macro fundamentals.
The rand is undervalued from a purchasing power parity perspective, which relates to the earlier point of a relatively moderate inflation versus main trading partners.
HSBC expects the rand to strengthen to R16/USD by the end of 2023.