The FOMC’s hawkish messaging last week helped to accelerate the recovery in USD/ZAR. Economists at Credit Suisse now expect USD/ZAR to trade in a noisy fashion between 13.60 and 14.40 (up from a previous forecast of 13.40-13.80). While there is a risk of wider lockdowns amid rising covid cases, local developments remain of secondary significance for the FX markets.
A noisy trading range in USD/ZAR
“We now expect the recent rally in USD/ZAR to be replaced in the short run by a relatively wide and noisy range trading. The FOMC’s message from last week will likely make large short USD/ZAR positions seem unattractive to many investors, and will probably limit USD/ZAR downside to around 13.60, i.e. to levels close to the low seen before the FOMC meeting.”
“Investors seem to us unlikely to take USD/ZAR significantly above its recent high of 14.40 without fresh USD-positive catalysts.”
“Judging by historical correlations, a substantial rise to levels such as 15.00 will require a dramatic deterioration in the EM risk sentiment in the context of large increase in real rates in the US or a sizable drop in global equities.”
“On the local front the trend in new COVID-19 cases remains unfavourable, and the rollout of vaccinations remains relatively slow. These developments have forced the government to move the country into ‘level three’ restrictions (there are five levels) from 16 June. While the risk is on the side of tougher restrictions in the short run, we think that there is a relatively high bar for markets to price in a substantial disruption to South Africa’s core economics engines (such as mining).”