USD/ZAR: Rand to reverse strong gains as Fed moves to tighten policy – MUFG

During June the South African rand weakened notably against the US dollar from 13.747 to 14.296. According to economists at MUFG Bank, ZAR is less attractively valued now, therefore, the USD/ZAR pair is set to rise after recording outsized gains.

Rand strength to ease going forward

“The SARB has been cautious over tightening policy. The SARB has though signalled they plan to raise rates during the second half of this year. We have pencilled in two 25bps rate hikes in Q3 and Q4.”

“The SARB’s concerns over upside inflation risks will have increased further after the headline annual rate picked up to 5.2% in May. At the same time, South Africa’s economy has been rebounding more strongly than expected. Growth forecasts for this year are being revised closer towards 5.0% following last year’s contraction of - 7.0%.”

“The SARB’s relatively dovish policy stance could be playing a role in recent rand underperformance alongside the less attractive valuation.”

“The rand has benefitted from the improving outlook for global growth which has helped lift commodity prices and improving South Africa’s terms of trade. South Africa’s external position has improved notably as well as it continued to record a sizeable current account surplus of 5% of GDP in Q1.” 

“On balance, we expect rand strength to ease going forward after outsized gains over the past year.”