Forex Investment and Currency Trading

With the MPC having hiked the rate by 50bp, a smaller than expected increase, the rand is expected to remain under
pressure. The list of negatives stacked against the currency will likely outweigh policy rate support.

• Adjusting for volatility, ZAR is not particularly attractive. Although it is the second highest-yielding currency in EM, much of the carry benefit is offset by its volatility.
• The growth/inflation mix continues to deteriorate. In particular, constraints on power supply are likely to weigh on growth for some time, impairing manufacturers’ ability to take advantage of the weaker rand and raise production for export.
• The current account deficit is still widening. Next week’s Quarterly Bulletin will contain official Q1 data, which market expects to show further deterioration, to -8.7% of GDP.
• The rand is vulnerable to a commodity price correction. A closer look into the performance of the local stock market shows that commodity-related indices have been crucial to performance this year. A correction in the commodity rally could therefore hurt foreign flows into the JSE and put the rand under pressure.
• The global outlook for risk premium remains challenging. The rand is vulnerable to further unwinding of carry trades. And given the increased importance of the credit channel for the economy in recent years, credit market turbulence is likely to continue to weigh on investor sentiment towards South Africa and on domestic growth.

Market believes that more aggressive monetary policy action by the MPC could have helped the currency in the long run. But the MPC has instead retained a more cautious tightening pace. For the remainder of this year at least, given the above factors, the worst has yet to come for the rand.