USD/ZAR: Cross bottoming over next 3-6M – Danske

The USD/ZAR pair dropped sharply during the first week of November, as investors have been pushed to hunt for yield, explained analysts at Danske Bank. They see the South African Rand (ZAR) supported by high commodity prices in industrial and precious metals but they do not expect this to last through to end-2021. They forecast USD/ZAR will bottom over the next three to six months. 

Key Quotes: 

“Since the March lockdowns, global policy support and a continued increase in demand from Asia have helped lift commodity prices, supporting most emerging markets (EMs). The ZAR and many other emerging market currencies have benefitted from this combination of the Fed’s weak USD policy and China’s ramp-up in demand.”

“USD/ZAR has gone from its pre-COVID-19 pandemic peak of 19.00 to slightly shy of 15.00. We note that South African fundamentals have weakened amid this. Public debt is likely to hit 90% of GDP, levels of industrial and electricity production remain stagnant if not outright trending lower, unemployment has formally hit 30% and inflation remains at 3%. On net, we view most, if not all, of the fall in USD/ZAR as due to global tailwinds, not domestic. For example, precious and industrial metals have on average risen by 40% since March, boosting the economy and providing strong but temporary help to the ZAR.”