USD/ZAR: A bearish perspective for the rand over the medium-to-longer term – Wells Fargo

The South African rand was among the worst performers of the week with USD/ZAR rising more than 2%. The recent fall in the currency can be attributed to another wave of COVID infections and subsequent lockdowns, while politically charged protests related to the imprisonment of former president Jacob Zuma are dampening sentiment toward the rand, explained analysts at Wells Fargo. They see a weaker currency over the medium to longer term. 

Key Quotes: 

“We do not believe the social unrest will last much longer and will not bake a further increase in political risk into our USD/ZAR exchange rate forecast. In fact, reports today (July 15) suggest efforts to suppress violent protests have been successful and demonstrations are beginning to calm, and the currency has recovered some losses. However, the South African economy could come under additional pressure as a result of protests, and the likely economic disruptions will act as further rationale to maintain our bearish view on the rand going forward.”

“Given the current state of the economy, we believe financial markets are mis-pricing policy rates in South Africa, which in our view, should also contribute to a weaker currency. As of now, financial markets are priced for policy rates to be 3.88%, implying 63 basis points of tightening over the next three months.”

“We believe rates are likely to be left on hold at least through the end of Q3, and as of now, through the end of the year. SARB will meet to assess monetary policy next Thursday, where we believe it will adjust expectations for interest rate increases. We expect South African policymakers to communicate the local economic recovery is uneven and uncertain, and as a result, monetary policy will need to be as accommodative as possible. In addition, we feel policymakers will focus its statement on rising inflation, but ultimately suggest price growth is temporary. Transitory inflation dynamics should also keep interest rates on hold. As interest rate hikes get priced out of financial markets, the rand should come under pressure and continue to depreciate through the end of this year and likely into 2022.”

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