Strategy Note /

Will the South African Rand blow or remain resilient?

  • ZAR amongst best performing EM currencies this year

  • ZAR resilience improves as commodity boom boosts SA’s terms of trade

  • ZAR amongst most attractive EM carry trades

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
14 October 2021
Published byETM Analytics

Will the ZAR blow or remain resilient?

The big question facing traders at the moment is whether the ZAR remains resilient or whether it blows. The trajectory of the ZAR over the coming months will play a vital role in determining the path of inflation and, in return, interest rates. While at first glance, it may seem as if the ZAR has already begun to blow out, taking a more wholesale look at the performance of emerging market FX this year, we see that the ZAR has, in fact, been remarkably resilient this year.

ZAR amongst best performing EM currencies this year

Despite all the domestic headwinds, including the deadly July lootings, a slow vaccine rollout, ongoing load-shedding and uncertainty ahead of the municipal elections, the ZAR is amongst the top-performing emerging market currencies in 2021. Specifically, the ZAR is the sixth best-performing currency this year out of the twenty-four emerging market currencies tracked by Bloomberg, losing less than 2% against the USD. Note that the likes of the Turkish Lira, Chilean Peso and Thai Baht have all lost in excess of 10% against the greenback since the start of the year.

ZAR resilience improves as commodity boom boosts SA’s terms of trade

The resilience in the ZAR this year is explained by findings from ETM’s Currency Resilience Model. The ZAR has risen up the resilience rankings to 8th out of all 22 currencies included in the model. Relative to its emerging markets counterparts, the ZAR ranks an impressive second. Looking at the sub-components, there was an improvement across the board, with the fiscal, fundamentals, and monetary rectitude all rising in recent months. The very strong commodity terms of trade played an important role in helping fundamentals and fiscal rectitude improve.

Rate hike bets bolstering ZAR attractiveness

Adding a pillar of support to the ZAR’s resilience has been the significant shift in rate hike expectations in recent months as inflation risks continue to mount. The SARB's commitment to fighting inflation has led investors to price in a rate hike at every meeting for the next two years. These aggressive rate hike bets are bolstering the ZAR’s resilience.

ZAR amongst most attractive EM carry trades

While SA is lagging many of its emerging market peers in hiking interest rates, the ZAR is still one of the most attractive carry trades. Underpinning the ZAR’s carry attractiveness is SA’s favourable terms of trade and current account viability on the back of the recent commodities boom. That said, the favourable terms of trade and current account viability are unlikely to remain over the long term, with SA’s trade balance expected to revert into deficit territory next year as import growth recovers. We do however expect the ZAR to remain amongst the most attractive candidates for carry trades over the next 6 months.

Bottom line: While some external headwinds are mounting, fundamentals suggest that the ZAR will remain resilient over the next 6-8 months. This notion is underpinned by expectations for commodity prices to remain lofty in the months ahead, underpinning SA’s terms of trade and current account. Moreover, given all the structural headwinds facing SA’s economy, including the latest bout of load-shedding, import demand is expected to remain weak. Therefore, with the exception of an emerging market crisis or global financial meltdown, it is unlikely that we will see the ZAR blow out in the next couple of months.