News & analysis

The covid-19 situation in South Africa has deteriorated substantially since the turn of the year, resulting in substantial sell-off in the rand and reversing the gains generated over the last six weeks. At 15.5, the rand sits close to 5% lower against the dollar year-to-date with only 5 trading sessions elapsed so far.

While external conditions turned positive for the rand, with broad USD weakness and higher commodity prices being a theme in markets of late, deteriorating domestic conditions continue to weigh on investor sentiment – which itself has only just recovered.

South Africa recorded 21,832 new Covid-19 infections on Wednesday, a 21% increase in the case count relative to previous peaks, while the positive test rate has also climbed. This suggests that the true number of new cases in South Africa is much higher than the figures suggest and that the recent rise in new cases isn’t due to expanded testing.

Additionally, the level of new cases isn’t the only concerning detail, but the speed in which the spike was registered took many by surprise – cases jumped from 14,410 to 21,832 overnight.

The recent surge in cases hasn’t been met with a dramatic response from government officials either. South African remains in level 3 lockdown although these measures have been tightened ever so marginally over the Christmas period. The new adjusted level 3 restrictions see the hospitality sector in South Africa remain open, just with a ban on alcohol sales, along with schools and places of employment. However, a tighter curfew has been imposed between the hours of 21:00 and 06:00; restaurants and bars must close at 20:00. With little fiscal and monetary firepower to offset more draconian measures, the economic council are reluctant to tighten measures further, with the next review scheduled on January 15th. However, should the rise in infections continue as the new variant takes hold of the South African population, a dramatic imposition of tighter measures may be on the horizon – this will only exacerbate the recent USDZAR trend.

On the vaccine front, headlines suggest that South Africa has acquired 1.5m vaccines for delivery in January, but this is barely enough to cover the countries 1.25m healthcare workers, let alone those that are vulnerable.

The target is to continue acquiring vaccines to cover 10% of the population by late February, with 40m citizens receiving the vaccine by year-end (around 2/3rds of the current population).

With all of this in mind, the recent unwind in the rand is likely to continue, with the pace of the sell-off dictated by the speed in which the domestic outbreak progresses. A flattening in the case count may temporarily cause USDZAR to stabilise in the short-term, but markets have learnt that spikes in cases don’t tend to plateau without a substantial reaction in containment measures. If options markets are anything to go by, 25 delta risk reversals have recently spiked to their higher point in May, suggesting that upside protection on USDZAR is becoming incrementally more expensive than downside protection – a sign that options markets are positioning for more sustained ZAR depreciation over the coming month. While this poses substantial risks to our short-term view of sustained ZAR appreciation, the level of information on the current situation is too limited to warrant us to revise our structural view on the rand for a recovery back towards the 14.00 level in the coming 6 to 12 months.


USDZAR rises near 5% at the beginning of the year, reversing the rand rally exhibited over the last six months 


USDZAR 25-delta risk reversal rises to its highest point since May 2020


South Africa’s case count spikes overnight, placing pressure on the rand 


Author: Simon Harvey, Senior FX Market Analyst



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