Forex Investment and Currency Trading

1 – 3 Month Outlook – USD/ZAR at 8.80 at year-end

Global financial contagion has hit the ZAR hard, with USD/ZAR spiking up to 9.00 and beyond. The net move, from a recent low of 7.22 in early July, is almost certainly an over reaction in the near term, but it does highlight the extreme volatility of holding what many regard as one of the benchmark emerging market currencies. To a certain extent much of the bad news is discounted at least as far as the next few months are concerned. Weaker commodity prices, a further spike in inflation and a topping out in domestic interest rates have long been factors discounted by the FX market. On the political front, the repercussions of Thabo Mbeki’s resignation should have no lasting impact now that it has been confirmed that Trevor Manuel will remain at the finance ministry. If the extreme stresses seen in the global financial system over the past month get no worse (admittedly a big assumption) market expects USD/ZAR to end the year at 8.80.

6 – 12 Month Outlook – Downside risks in 2009

Over a longer term horizon market remains cautious on the ZAR. From an international perspective, the view of a general appreciation of the USD will weigh on the South African currency. In addition, it is difficult to be optimistic about domestic political and economic events. On the political front, a Zuma run administration still holds fiscal risks given widespread ANC pressure for additional public spending. On
the economic front there is a growing debate over the timing of lower interest rates, with the market now expecting a cut in 09Q2. The central bank has implied that rates will remain at present levels for some considerable time, but indirect political pressure may encourage the SARB to move early, adding to already high inflationary expectations. Given missed inflation targets over recent years it is believed that the bank needs to be slow to act if it is to have any chance of rebuilding credibility and preventing a further depreciation of the ZAR. Finally, the external accounts remain a negative for the ZAR in 2009. Market forecasts show the current account deficit running at 8% /GDP; a troubling figure given that much of the shortfall is financed by short-term capital flows. Market 12 month USD/ZAR forecast is 9.25, with the risks still skewed towards a higher figure given the potential of unwanted fiscal/monetary easing.