South Africa Is Headed North: Pros

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Thought much about the South African rand lately?

I didn't think so.

Between political turmoil in Italy, the ongoing fiscal cliff negotiations in the U.S., and the looming Japanese elections, currency investors have had plenty of other things to worry about.

The good news in all this is that while you weren't looking, the outlook for the rand has been improving, according to the currency strategists at Barclays Capital.

"A lot of negative domestic news is already priced into the ZAR," they wrote in a note to clients, so any change in news flow shoudl lift the currency. Also, they says, "ZAR valuations suggest that the local unit is oversold on a variety of metrics."

South Africa was hit by protracted mining strikes earlier this year, as well as a bout of forex hedging related to its renewable energy projects. The country's credit rating felt the effects. But the BarCap strategists argue that "we do not expect the aforementioned industrial action and FX hedging to be repeated in Q1 13, and unless there are some negative policy surprises from this month's ANC elective conference we believe that at least some of the SA-specific risks that have plagued the ZAR in recent months could fade."

The rand will likely perform especially well against the yen, the strategists say, since they believe elections in Japan will be followed by monetaryand fiscal stimulus moves.

So they recommend buying the rand against the yen at 9.48 with a stop at 9.20, looking for a move to 10.00 over the next three months.

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