Bank of America (BofA) analysts who consider the South African Rand (ZAR) to be significantly undervalued. They forecast a potential appreciation of the currency against a stabilizing U.S. dollar. The analysis is rooted in the expectation of higher real GDP growth for South Africa, alongside a single rate cut by the South African Reserve Bank (SARB) in January.
BofA revised its real GDP growth estimate for South Africa to 1.6%, a slight decrease from the previous 1.8% forecast but still a notable improvement from sub-1% growth in the past two years. Inflation is expected to average 4.3% in 2025, which falls below the SARB’s target of 4.5%.
Despite global risks, BofA predicts the central bank will reduce the policy rate to 7.50% in January and maintain it for most of 2025. The cumulative cutting cycle is anticipated to be 75 basis points. However, analysts also foresee a rate hike in the last meeting of 2025 as inflation is projected to rise above the target.
The bank’s analysis suggests that the current value of the ZAR does not align with economic fundamentals, and there is potential for significant appreciation. Additionally, the positioning in 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 begins to stabilize.
Furthermore, BofA finds that the front-end swaps are too low, and the 5-year and 10-year yields are too high when compared to their macroeconomic forecasts. This discrepancy is expected to result in a flattening of the yield curve. Also noted was that asset swap spreads (ASWs) have tightened excessively, given that the fiscal outlook for South Africa has not substantially improved over the past three years.
In summary, BofA’s analysis presents a constructive outlook for the South African Rand, underpinned by a favorable economic forecast and an anticipated policy rate cut by the SARB. The bank’s findings suggest potential adjustments in the financial markets as the currency aligns with macroeconomic realities.
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