South African Rand: Recovery scenarios after SARB surprise – Commerzbank

FXStreet Insights Team FXStreet

Commerzbank's Volkmar Baur reviews the South African Rand (ZAR) after its earlier appreciation against the US Dollar (USD) stalled with the Iran conflict. He highlights deteriorating terms of trade, rising inflation above the South African Reserve Bank's (SARB) new target, and July’s unexpected rate hold. Baur outlines several scenarios for ZAR, stressing that even in positive outcomes, Rand recovery will likely be slow.

Rand outlook tied to SARB stance

"We consider the July decision not to raise the policy rate to be a mistake. It suggests to the market that inflation trends and the associated risks are not being taken seriously enough. Consequently, we expect the foreign exchange market to demand a risk premium in the coming weeks, which will weaken the rand."

"We currently see three possible scenarios. First, the central bank is proven right, and despite an ongoing conflict and high oil prices, inflation does not rise further. In this case, the rand should recover soon."

"Second, the Iran conflict ends soon and the price of oil falls. In this case, the rand would be saved by geopolitical developments. However, a risk premium would remain because the SARB’s credibility would still be tarnished."

"And third, the Iran conflict continues to smolder, oil prices remain high, and the SARB reverses course. In this case, while high energy prices would continue to weigh on the rand, the central bank would have the opportunity to regain market confidence over time. Trust is earned in drops and lost in buckets."

"Another possibility, of course, is that the SARB refrains from raising interest rates further despite continued inflationary pressure. We consider this highly unlikely, but it would put significant pressure on the rand. Even in the more positive scenarios two and three, however, it will take time for the rand to recover."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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