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 [...]

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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 [...]

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Evidence is mounting that tight monetary policy is finally slowing the economy.
Business confidence has slumped, house price growth has ground to a halt, retail sales are weak and there has been a modest slowdown in consumer borrowing. Electricity shortages also intensify the risk of a slowdown as rationing is planned while Eskom invests in new capacity.
Potential for a further 100bp in policy tightening to 12% this year is possible, as recent rand weakness reduces the likelihood that inflation will return to target by the end of this year. Break even spreads and survey data also point to higher inflation expectations, [...]

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