USD/ZAR: Rand should do well given South Africa's large weighting in EM bond and equity benchmarks – ING

The South African Rand is holding up despite the lack of a rate hike. Economists at ING analyze ZAR's outlook.

Market thinks that the SARB has concluded its tightening cycle

The vote was close – three to two in favour of unchanged rates – but now the market thinks that the SARB has concluded its tightening cycle and will be easing policy in the first half of next year.

The fact that the Rand did not sell off more shows that investors feel calmer about inflation prospects and increasingly like high-yield EMFX ahead of a possible cyclical Dollar decline later this year. The Rand of course has its challenges such as weak growth, a widening current account deficit, and the geopolitical headwinds of its relationship with Russia. However, if we are right that portfolio flows to EM rebound later this year, the ZAR should do well given South Africa's large weighting in EM bond and equity benchmarks.

As for most other high-yield EM currencies, we think the Rand can outperform the steep USD/ZAR FX forwards curve.