Bottom Line:
• Since the previous report, the ZAR has undergone a significant correction. It moved from being overvalued back into undervalued territory, and the move was dramatic enough to raise some eyebrows. Investors immediately started to position for the possibility that the bout of depreciation would gather momentum and generate another exhausting blow-off. The reality was quite different, and again, there appear to be reasons to feel that the ZAR still enjoys some resilience, all of the challenges SA faces notwithstanding.
• The collection of the charts which follow cover the arguments both for and against ZAR depreciation. However, the summarised conclusion is that although some of the underlying factors are no longer quite as supportive as they were, it is not a heavily distressed situation that warrants the ZAR to depreciate aggressively. That the bout of ZAR depreciation has remained reasonably well contained speaks volumes.


Baseline view:

In just two weeks, the ZAR undid its overvaluation and now offers a lot more value to exporters. From its current, undervalued position, the argument for substantial further depreciation weakens, especially as the ZSI, carry attractiveness and inflation outlook is more sanguine than those of SA’s main trading partners. Again, we would urge exporters to consider the value that current levels offer and to seek strategies to take advantage.


Broad expectations and understanding value ranges
It is often useful to find a tool that helps unpack value ranges quantitatively, which prevents emotional decision-making when making hedging decisions. Traditionally, understanding value has been a somewhat nebulous concept that comes down to a range of factors, including what kind of tolerance a business has for unfavourable currency movements, the indicators that follow attempt to identify different periods that might offer relative value either for importers or for exporters.

  • For all the ZAR’s recent weakness it is trading only marginally in oversold territory. Importers that didn’t take advantage of the ZAR at 14.50 have missed the boat for the next couple of months.
  • However, exporters have been given a reprieve and although it is not an obvious trade for exporters to hedge, the levels that they can achieve at the moment have improved considerably.

  • Implied ZSI levels have normalised, but they continue to point to a ZAR that can stage a recovery and could still trade to levels back down towards the 15.00/dlr handle.
  • For all the problems that emerging market currencies face and that SA is challenged with, the underlying momentum suggests that the ZAR is still trading at levels considered too weak although the downside bias has weakened.

  • ETM’s ZAR Sentiment indicator (ZSI) has remained firmly in positive territory and resisted the temptation to turn lower despite the recent volatility and the speculation that has favoured the USD.
  • It suggests that the depreciation in the ZAR will not be sustained in the future, and perhaps even less so should the ZAR experience one more depreciative leg weaker and turn even more undervalued.
  • It is telling that the ZSI has remained in positive territory throughout the past month despite all the difficulties. It suggests that there is an underlying resilience to the ZAR which is bound to reflect in the months ahead.

  • With the exception of fiscal risk which has remained stable, monetary rectitude and fundamental resilience have deteriorated slightly. That is not surprising given the rise in inflationary pressures, growth in money supply and PSCE that is accelerating and the weakness of the underlying economy.
  • Although that does not sound particularly encouraging, the results need to be seen in comparison to other economies that have experienced similar challenges. SA has held its own in the top half of the rankings of twenty-two countries and this result should therefore not be seen as overtly negative.


  • Carry attractiveness has revealed some interesting developments through the past month. EM carry attractiveness has deteriorated markedly, while DM carry attractiveness improved as a result of the rate hikes implemented.
  • What is particularly interesting is that the ZAR has remained well elevated and comfortably above the emerging market average. It suggests that from a carry perspective alone, the ZAR is in a good position to enjoy greater resilience.

  • From an overvalued position, the ZAR has turned to being undervalued again in a very short space of time. A mixture of factors was to blame, amongst them the strength of the USD, the collapse in risk appetite, the deterioration in SA’s terms of trade, the resumption of load shedding and some corporate flow.
  • Now that the ZAR is back in undervalued territory, the propensity to sell off has dissipated to some degree.

  • There have been some dramatic movements in the performance of the USD not entirely explained by the build-up of speculative long USD positions.
  • Although it is true that speculators built their long positions, the build was not dramatic, suggesting that speculation took place predominantly in the spot market rather than the futures which drove the USD spot market higher. Nonetheless, there was a build-up of longs and support from futures too.

  • ETM’s inflation risk indicator remains buoyant, but does not point to inflation rising above the upper limit of the inflation target band for a while. This is a substantially more modest inflation picture than that of many countries abroad.
  • However, that might change once the government removes the fuel levy and prices adjust aggressively in June. Should they rise dramatically, the inflation data will experience a short-term spike.

  • Although the ZAR is not doing much to help contain the rise in inflation, it does not appear to be contributing massively in the way it has done in previous ZAR depreciation episodes. By comparison, the depreciation in the ZAR has been relatively modest.
  • It is also notable that the credit cycle remains tight and that it too will not contribute strongly to any sustained rise in inflationary pressures.

  • SA’s terms of trade have deteriorated markedly in recent weeks as investors fret about the global growth slowdown and the weaker demand outlook that will dominate commodity markets. The weakness in the Chinese economy hasn’t helped much either.
  • The initial bump up that occurred when the war broke out, appears to have quickly dissipated as the focus shifts from anticipated scarcity to deficient demand.

  • Although the trade balance appears to be holding up reasonably well, a modest recovery in the SA economy has detracted from the surplus through stronger consumptive demand reflected in the credit cycle.
  • Given the constraints on household disposable income and the SARB’s anticipated rate hikes, it is unlikely that the trade balance will remain as firmly in surplus as it has been, especially as commodity prices are also selling off.

  • While general government is reducing its fixed investment as reflected by the blue line, the private sector is picking up the shortfall. This would be in keeping with the general direction of reforms that the government is targeting.
  • However, it does reflect the structurally weak backdrop that constrains economic growth and which will detract from demand for imports. Only should these data ramp up, will the pressure on the ZAR intensify.



Written by George Glynos, ETM Analytics