USD/ZAR to spike toward 18.00 on intensified US-China tensions – Rabobank

Economists at Rabobank notes how the rand has been a major beneficiary of the revival of carry trade. Nonetheless, they expect the USD/ZAR pair to escalate towards 18.00 when Sino-American tensions flare up.

Key quotes

“A relatively attractive carry trade cannot be the source of sustainable gains over the long-term horizon. It has to be supported by solid economic fundamentals, which South Africa currently lacks. Therefore, the rand is purely at the mercy of speculative flows which can change direction overnight. To adopt a positive long-term view on the rand the Ramaphosa administration would have to make substantial progress in addressing structural fiscal issues.” 

“While Finance Minister Mboweni remains fully determined to prevent the worst-case scenario of South Africa plunging into a debt spiral, he does not seem to have sufficient support amongst the ANC lawmakers to approve unpopular reforms. Mboweni’s determination is unlikely to provide the rand with enough insulation if the external backdrop worsens and the dollar appreciates.”

“We expect USD/ZAR to spike again to around 18.00 in the coming months when tensions between the US and China (and China vs other countries) are likely to escalate further. The markets may also end up disappointed with the pace of global recovery as various countries have been forced to reintroduce restrictions due to a spike in new coronavirus cases.”