The South African rand continues to outperform - BBH

Analysts at Brown Brothers Harriman explained that the rand continues to outperform.  

Key Quotes:

"In 2016, ZAR rose 13% vs. USD and was behind only the best performers last year were BRL (+22%) and RUB (+20%).  So far in 2017, ZAR is up 5% YTD and is closer to the middle of the EM pack. Our EM FX model shows the rand to have VERY WEAK fundamentals, so this year’s outperformance is not warranted.

USD/ZAR has traded in a narrow 13-14 range since the end of Q1. After breaking below 12.50 briefly in March, the news of Gordhan’s sacking saw the pair spike quickly to trade near 14 in early April.  The last major retracement objective from the March-April rise comes in near 12.94 (62%), and a break below would suggest a test of the March 27 low near 12.3125.  

South African equities continue to underperform.  In 2016, MSCI South Africa was up 1% vs. 7% for MSCI EM.  So far this year, MSCI South Africa is up 10% YTD and compares to 17% YTD for MSCI EM. This slight outperformance should intensify, as our EM Equity model has South Africa at a VERY UNDERWEIGHT position.  

South African bonds have outperformed modestly. The yield on 10-year local currency government bonds is -36 bp YTD.  This is behind the best performers Argentina (-190 bp), Indonesia (-94 bp), Russia (-87 bp), Colombia (-80 bp), Turkey (-65 bp), and Peru (-61 bp).  With inflation likely to continue falling and the central bank perhaps tilting more dovish, we think South African bonds will continue outperforming.  

Our own sovereign ratings model show South Africa’s implied rating at BB/Ba2/BB.  As such, we believe actual ratings of BB+/Baa2/BB+ remain subject to significant downgrade risk. The loss of investment grade from Moody’s seems likely very soon. We believe a one notch cut to Baa3 is a done deal. However, there is a small chance of a two notch cut to Ba1. Two notch moves are very unusual, but they have been seen in the past."