USD/ZAR Forecast: Local and International Factors Wilts Rand
- Fed under pressure to combat inflation.
- Loadshedding interruptions.
- Political instability reaffirmed by July riot report.
- Weakness across rand-linked commodities.
ZAR FUNDAMENTAL BACKDROP
THE CARRY TRADE
The South African rand has been slipping after holding the title for the best performing currency against the US dollar in 2022 (see graphic below). The Brazilian real has since taken over emphasizing the divergence in central bank policy between the two Emerging Market (EM)nations. I have mentioned this in a previous analysis but now price action is bringing clarity to the protection against a diminishing carry trade as a result of a hawkish Federal reserve.
CURRENCY PERFORMANCE AGAINST USD YEAR-TO DATE
LOCAL ECONOMIC AND POLITICAL WOES
The persistent problem of rolling blackouts across the country has emerged once more adding to an already ailing economy trying to develop post-COVID. Disruptions to households and business alike continue to weigh heavily on economic growth and business confidence.
Political challenges are exacerbating the problem of dwindling confidence after the report following the July riots were released yesterday. The report basically outlined the inability of security services to conduct themselves in a manner befitting of their mandate while factional clashes within the ruling ANC party adds to political instability. More details around this report will be addressed by President Cyril Ramaphosa later this week (SONA).
Russia/Ukraine pressures are very much elevated while many western countries aim to diffuse the situation via various methods. While this threat looms, EM currencies may be stifled as risk aversion may take precedence over higher yielding assets.
High impact events this week are confined to Thursdays US inflation print and the State of the Nation Address (SONA) later that day. Focus will be around US inflation as estimates anticipate a notable increase to 5.9% from 5.2%. Should this come to fruition or exceed the forecast, significant dollar appreciation could threaten much of the rands 2022 gains as hawkish Fed bets increase.
Source: DailyFX economic calendar
USD/ZAR DAILY CHART
Chart prepared by Warren Venketas, IG
The tide may be turning for the rand since late November 2021. Although this may be an early call but the upside potential considering the fundamental backdrop is strong.
- Channel support
Trade Smarter - Sign up for the DailyFX Newsletter
Receive timely and compelling market commentary from the DailyFX team
Contact and follow Warren on Twitter: @WVenketas
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.