Above: File image of SARB Governor Lesetja Kganyago, Image © GovernmentZA

The South African Rand should be getting its skates on and outperforming its global peers as the U.S. Dollar retreats, according to Goldman Sachs, but it has disappointed.

In a recent research note, analysts at the Wall Street investment bank expressed frustration with ZAR's recent underperformance but predicted the currency could still play catch-up.

In the bank's 2024 FX outlook, analysts anointed the Rand as one of their preferred 'longs' for a more convergent world, where the growth outlook between the U.S. and China becomes less divergent than in our base case.

"This 'convergence' macro regime has dominated the FX price action through November as the better balance between growth and inflation in the US has driven the Dollar weaker and US yields lower, and a series of stronger CNY fixes helped extend this move and lift China-linked sentiment," says Goldman Sachs in a weekly currency strategy note.

Despite the stars aligning to the upside, "the Rand has clearly underperformed its peers through November," say analysts.

Furthermore, metals prices, a key consideration for South Africa's export economy, have also moved in a supportive direction.

Domestic developments could explain the underperformance, according to researchers.

"While the Rand strengthened through the first half of the month, it gave back these gains over the last week as a number of domestic developments clouded the outlook," says Goldman Sachs.

These developments include news on regulatory changes relating to pensions, a stronger-than-expected inflation print followed by a dovish hold by the SARB, and a continued trickle of concern around the supply side of the economy.

"Given our economists' more benign view on the inflation outlook (relative to the SARB and consensus) and the fact that October inflation was driven by volatile factors, we do not think this dovish policy shift is out of place relative to the data," says Goldman Sachs.

Similarly, the Wall Street bank's economists do not expect the change in pension regulation to have a lasting market impact.

"Therefore, we think that policy-driven ZAR weakness is not fully justified," says Goldmans.

As such, if the USD sell-off extends further, strategists at the bank think the Rand has room to catch up to its peers and trade towards a near-term target of 18.50.