USD/ZAR: Unlikely to fall beyond the 14.60 area

Economists at Credit Suisse lower the USD/ZAR target to 14.60 (from 14.90 previously). While the recent rally in metal prices is encouraging for the rand, the government’s budget presentation next week (24 February) and the very recent bounce in US real rates lead the Credit Suisse analyst team to be sceptical about the ability of USD/ZAR to fall much below them mentioned new target in the short-run.

Key quotes

“We lower our USD/ZAR target to 14.60 (from 14.90 previously). This forecast revision is mostly intended to mark-to-market our USD/ZAR target to an improvement in global conditions since 3 February. Back then we argued that a drop to the 14.50 area would require a combination of an extension of the rally in the S&P 500 to new highs and well-anchored real rates in the US. This scenario seemed to be materializing though it was undermined yesterday when an abrupt up-creep in US real yields triggered a broad-based weakness in the EM currency complex.”

“Local factors have pointed in a rand-positive direction too in the last two weeks or so. South Africa’s covid infection data have declined sharply and precious metals have rallied. Both of these developments have helped pave the way for investors to look for a meaningful bounce in economic activity in South Africa later this year and hence to price in improved forward-looking carry.”

“We find it premature to set aggressive short-term targets on the downside for USD/ZAR – such as the pre-pandemic low of 13.93. Several reasons warrant a degree of caution. First, a buildup of long rand positions leaves USD/ZAR vulnerable in case US real rates continue to rise or if global risk sentiment deteriorates. Second, although the government is unlikely to deliver major fiscal measures; we still cannot completely rule out a large USD/ZAR move of, for example, 2% in either direction. Third, although we find the rally in metal prices encouraging, we do not think that this rally alone can take USD/ZAR substantially lower.”

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