USD/ZAR: Downside risks for the rand have eased – MUFG

The South African rand has risen sharply during May against the US dollar. Analysts at MUFG Bank, argue domestic bond liquidation has slowed helping to ease downward pressure on the rand. They forecast USD/ZAR will reach 17.00 by the third quarter and 16.75 during the fourth. 

Key Quotes:

“The rand has finally rebounded against the US dollar alongside other hard hit emerging currencies such as the Mexican peso and Brazilian real. US dollar  weakness has broadened out. The reversal of lockdown measures and optimismover the search for a COVID-19 vaccine have helped to brighten the global growth outlook, and left the US dollar more vulnerable to aggressive Fed easing. The South African government announced its own plans to ease their strict lockdown further on 1st June.”

“The SARB expects the South African economy to contract even more sharply this year by -7.0% followed by a modest rebound of 3.8% in 2021. It has already prompted the SARB to lower their key policy rate to the lowest on record. The scope for further cuts appears more limited now.”

“The deterioration in the public finances already prompted Moody’s to strip South Africa of its last remaining investment grade rating, and subsequently their government bonds have been removed from the FTSE World government bond index. It triggered heavy capital outflows in March when foreign investors sold a net ZAR55.6 billion of South African bonds. The pace of outflows has since eased significantly to just ZAR4.8 billion in May as government bonds have since retraced all losses from March. In these circumstances, we expect the rand to strengthen modestly in the year ahead.”