USD/ZAR: Domestic fundamentals to dampen upside potential for rand – MUFG

During October the South African rand strengthened against the US dollar from 16.664 to 16.192. Nonetheless, the recent rand strength has not been backed up by foreign demand for domestic bonds and weak domestic fundamentals are set to temper the rand appreciation, per MUFG Bank. 

Key quotes

“A Blue Wave is seen as the best outcome for risk assets and the rand from the US presidential election as it favours more significant fiscal spending. An increased focus on infrastructure investment would be supportive for commodity prices and related currencies such as the rand. It could result in USD/ZAR testing support at the 16.000-level where recent lows are located.” 

“While the rand performed well recently, it has not been matched by favourable inflows into the South African debt market. Foreign investors have sold a net ZAR8.6 B of South African bonds in October. It was the heaviest month of selling since April following South Africa’s downgrade to junk. The heavy liquidation of South African bond holdings may have helped dampen the rand upside this month. It also cast doubt on whether recent rand strength is sustainable beyond the near-term. Market participants remain concerned by long-term debt sustainability.”

“The government has recently unveiled plans to lift GDP growth towards 3% over the decade through increased infrastructure investment. We expect weak domestic fundamentals to dampen upside potential for the rand in the year ahead as COVID-19 risks fade.”