HSBC Pitted Against Nomura on Rand’s Fate: South Africa Credit

HSBC Holdings Plc is squaring off against Nomura Holdings Inc. in predicting the future course for South Africa’s rand, the world’s worst-performing major currency in the past year.

The rand is the most undervalued out of 34 currencies based on measures including purchasing power parity and the Big Mac Index, and is set to rebound, HSBC said in a Feb. 13 report. Given the long-term outlook for South Africa’s economy, the currency is the most over-valued globally and likely to extend its decline, Nomura said Feb. 21. A weaker rand risks stoking inflation, reducing returns from investing in bonds.

South Africa’s currency, which takes its name from the gold-rich Witwatersrand ridge that runs through Johannesburg, weakened after three credit downgrades since the end of September and labor disputes at the nation’s gold and platinum mines cut output, stalling a recovery in Africa’s biggest economy. The decline has gone too far, said Murat Toprak, the London-based head of emerging-markets currency strategy at HSBC.

“The rand is one of the most attractive currencies out there after its sharp depreciation,” Toprak, who recommends buying the rand and forecasts a 13 percent recovery to 7.80 per dollar by year-end, said by phone yesterday. “The macro-economic situation isn’t too bright, but the depreciation has gone too far.”

Least Bearish

The currency may climb to 8.57 per dollar by year-end, according to the median estimate of 26 analysts in a Bloomberg survey. Options traders are the least bearish on the rand in more than five years. Investors paid a 2.42 percentage-point premium yesterday for the right to sell the rand relative to options to buy the currency. The so-called three-month 25-delta option risk-reversal fell to 2.38 percentage points on Feb. 15, the lowest since October 2007.

The chance of the rand trading at 7.80 per dollar by the end of 2013 was 28 percent yesterday, when the currency traded at 8.8188 per dollar, according to calculations by Bloomberg based on the prices of options contracts to buy and sell the currency. The rand strengthened 0.5 percent to 8.8214 per dollar by 3:13 p.m. in Johannesburg. The rand’s 14 percent slump in the past 12 months is the most out of 16 major currencies monitored by Bloomberg.

Widening Gap

A widening current-account deficit and faster inflation will weigh on the rand over the next three to five years, Peter Attard Montalto, a London-based strategist at Nomura, said in the report. The rand is about 20 percent overvalued in terms of Nomura’s medium- to long-term “equilibrium evaluation metrics,” which look at capital inflows and indicators such as the current account.

South Africa’s economy expanded an annualized 2.1 percent in the fourth quarter, from 1.2 in the previous three months, a report today showed. The median estimate of 20 economists in a Bloomberg survey was for growth of 1.7 percent.

Rising production costs have made South African industries uncompetitive, while the nation’s reliance on flows from investors into its equity and bond markets to finance its current account gap made the rand vulnerable, Montalto said in an e-mailed response to questions yesterday. The currency may decline to as weak as 9.25 per dollar this year, he said.

Slow Growth

The Reserve Bank raised its forecast for average inflation this year to 5.8 percent on Jan. 24 from a previous estimate of 5.5 percent. The shortfall on the current account, the broadest measure of trade in goods and services, was unchanged at 6.4 percent of gross domestic product in the third quarter, the highest level in about four years. The central bank last month estimated the economy will expand 2.6 percent this year.

Fitch Ratings cut the nation’s debt one level to BBB Jan. 10, citing slowing growth, the rising jobless rate and social unrest. While Fitch raised its outlook to stable, Standard & Poor’s and Moody’s Investors Service, which each lowered their ratings by one level last year, hold a negative view.

The cost of protecting South African dollar-denominated sovereign debt against non-payment for five years using credit default swaps rose 27 basis points, or 0.27 percentage point, this year to 170 yesterday, indicating a deterioration in risk perception, according to data compiled by Bloomberg.

South African bonds have returned 2 percent this month for dollar investors, the most out of sovereign indexes tracked by European Federation of Financial Analysts Societies and Bloomberg.

Swings in the rand makes it difficult to predict future moves, said Thu Lan Nguyen, a Frankfurt-based strategist at Commerzbank AG, the most accurate rand forecaster in the fourth quarter, according to data compiled by Bloomberg. The rand’s three-month implied volatility against the dollar was 12.14 percent yesterday, the highest out of 16 major currencies monitored by Bloomberg.

The rand may gain to 8.50 per dollar by year-end, Nguyen said in an e-mailed response to questions yesterday. “We project only a moderate recovery for the second half of 2013.”

Before it's here, it's on the Bloomberg Terminal.