USD/ZAR is trading at 17.1248 after rising from an intra-day multiweek low of 16.33 on Wednesday last week. Strategists at Credit Suisse flag two local developments, the government’s adjustment budget and the pace of increase in new Covid-19 cases, which could create idiosyncratic rand moves.
Key quotes
“We see mainly downside risks to USD/ZAR from the government’s adjustment budget which it will present to the public on Wednesday of next week (24 Jun). A tightening of fiscal policy at this point is likely to weigh on the economy’s ability to recover from the slump that Covid-19 restrictions have generated. But we still think that meaningful spending cuts are likely to be welcomed by rand-holders at this point. Vol markets are not pricing this event as a high profile one. Therefore we think that tightening measures next week could be seen as a positive surprise and take USD/ZAR up to 2% lower.”
“We think that the rising trend for new confirmed Covid-19 cases in the country may eventually weigh on the rand. So far the price action in the rand seems to suggest that markets are not too concerned about this development but we see a risk that an extension of the trend higher in new cases will lead markets to focus on the possibility of new restrictions which would then expose the country’s vulnerable fiscal position again.”
“Even a ‘market-friendly’ budget will not prevent USD/ZAR from rising back above the 18.00 level again if the EM FX complex sells off or from falling back below 16.50 in case risk markets take another positive turn. But the two mentioned new developments could nevertheless create a temporary decoupling and are worth bearing in mind.”
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