News & Analysis

The South African rand has remained a rollercoaster currency over the past few weeks. Having broken above the 15.00 handle for the first time since March to hit a high of 15.39 in late August, the rand is now grabbing market participants’ attention due to its aggressive retracement. The 9-day consecutive rally it currently holds marks its best string of gains since 2005, with the currency currently trading 6.7% higher when measured against August’s lows.

With momentum on its side, the question many investors are asking themselves is how far can the currency rally go, or is this a classic case of the “hot hand” fallacy?

 

Rand records longest string of daily gains against the dollar since 2005

The rand’s recent string of gains have largely been driven by a broad stabilisation in market risk sentiment, a GDP revision that found the economy to be 11% larger than previously expected, and a dovish shift from the Federal Reserve when Chair Powell spoke at Jackson Hole. While these developments have been conducive, and therefore reflected in the rand’s recent rally, we expect the tailwinds will start to fade.

  • Firstly, South Africa’s improved debt trajectory is now largely priced into assets; repricing in the SAGB curve has mostly taken place with the curve bull flattening relative to where it was trading at during August’s lows, while 10Y CDS is starting to stabilise after declining to lows not seen since early July.
  • Secondly, messaging from the Federal Reserve is unlikely to remain this accommodative for much longer. Friday’s Nonfarm Payrolls data could reignite expectations of earlier normalisation that may also be reflected in the Fed’s September dot plot. Such an event would undoubtedly put pressure on carry flows, especially into economies where central banks aren’t hiking rates like South Africa’s.

 

South Africa’s yield curve bear flattens after the improvement in the country’s debt metrics

As these tailwinds begin to fade, South Africa’s weak economic fundamentals will become more visible again, while expectations of a slower global economic backdrop will mean an improved current account surplus will struggle to pave over the cracks.

For this reason, we don’t expect USDZAR to break below recent ranges (sub-14.00), while positive developments in the US labour market and a hawkish adjustment to the Fed’s dot plot towards month-end is likely to put upwards pressure on the pair.

For these reasons, we have pinned our latest ZAR forecasts within the 14-14.5 range over the 12-month horizon and don’t expect the pair to break below the 14.00 level without a material improvement of South Africa’s economic fundamentals.

 

Author: Simon Harvey, Senior FX Market Analyst

 

 

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