Markets are expecting too much tightening from the South African Reserve Bank (SARB) warn analysts at CIBC. They see the USD/ZAR at 15.75 by the end of the first quarter and at 16.00 by mid-year.
Key Quotes:
“The South African Reserve Bank has followed the November hike with a second 25bp move, taking rates to 4.0%. After beginning the process of unwinding pandemic-inspired policy easing at their previous meeting, it seems that the central bank remains biased towards a slow and progressive data-dependent tightening cycle. After witnessing CPI threaten the top of the 3-6% CPI target range in December, we expect a potential overshoot in early 2022.”
“The rates trajectory is set to remain data-dependent. Therefore, if the central bank is correct in assuming that prices will be back in line with the mid-point of the CPI target range in two years, 4.5%, this would suggest that the market is overly aggressive in terms of pricing in 100bp of tightening in H1 this year.”
“Although the SARB may have hiked at consecutive meetings, we do not expect another move until the May meeting. The ZAR has proved a top performer versus the USD and EUR over the last two months.”
“The ZAR is an emerging market currency that is partly sheltered from the impact of Fed hikes due to elevated nominal yields. However, market recognition of too much tightening being discounted, impacting real rates, suggests that the recent rapid accumulation of ZAR real money speculative positions risks correcting. As a result, we look for USD/ZAR to trade back towards 16.00 into mid-year.”
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