USD/ZAR: Rand to reverse its appreaciation during the remainder of the year – CE

The South African rand has stood out as the best-performing EM currency against the US dollar since the start of the year. Despite its recent appreciation, economists at Capital Economics expect the rand – like most emerging market (EM) currencies – to end this year weaker against the greenback.

Commodity prices to fall back, US Treasury yields to resume their rise

“After a substantial rally from their lows during the pandemic, we forecast the prices of most industrial and precious metals – key exports of South Africa – to fall by year-end. Similarly, global risk premia are now at very low levels and we do not expect them to fall much further. If anything, risk appetite could falter as US Treasury yields rise.”

“We think that a weak economic recovery means that the Reserve Bank of South Africa (SARB) will need to keep rates low for longer than most currently anticipate. While South Africa’s fiscal discipline stands out compared to many similar emerging markets, it is also a cause of its slow economic recovery and underscores its heavy reliance on loose monetary policy.”

“Rising COVID-19 cases and limited vaccination progress are likely to slow the economic recovery further and raise the likelihood that the government will need to loosen its austerity measures. In that case, concerns about fiscal sustainability may start to affect the rand.”