Bottom Line:

  • Since the previous report, the ZAR has sold off sharply against the USD. While it is tempting to blame SA’s idiosyncratic issues of late, it is worth noting that this decline was in line with the rest of the EM currency basket. It was a function of a surging USD, which has found strong support from both global recession fears and expectations for the Fed to stick to its aggressively front-loaded monetary tightening cycle. However, the charts that follow suggest that this move may prove difficult to sustain.
  • The ZSI remains in positive territory, SA’s carry attractiveness is high, commodity terms of trade are still positive, and the prospects for SA’s economy are weak (which can be good news for the trade account). Moreover, the ZAR remains undervalued on a nominal PPP-adjusted basis, and even more so against an extremely overbought USD. This suggests that the ZAR’s selloff is looking increasingly stretched as it trades towards R17.0000/$, with the market increasingly poised for a correction.

Baseline View:

While global headwinds have the ZAR under immense pressure at the moment, it is looking increasingly oversold and ripe for recovery. The timing of this is uncertain, however, with market agents currently turning to the safety of the USD as they hide from prevailing growth and monetary policy risks. Nevertheless, the ZAR is poised for a strong rebound, meaning exporters might do well to take advantage of current trading levels by locking in attractive forward rates.



It is often useful to find a tool that helps unpack value ranges quantitatively, preventing emotional decision-making when hedging. 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.

  • The latest update of the ZSI model is pointing to a phase of recovery for the ZAR. The smoothed headline index has tracked the unsmoothed index deeper into positive territory, meaning traders in the derivatives markets view the asymmetry of the risk profile of establishing a long USD-ZAR position from current levels as high and rising.
  • Although the ZAR may still be subject to some turbulence in the months ahead, the ZSI suggests any bouts of depreciation will ultimately prove unsustainable with an appreciative bias set to manifest over the next six to eight months.


  • Although USD-ZAR levels as implied by the ZSI model have risen recently, they remain well below the current spot price to suggest the underlying bias in the market continues to favour ZAR appreciation.
  • Recall that these implied levels should not be treated as specific spot levels to target, but rather as an indication of the balance of risks facing the local ZAR. When the implied rate is notably below the spot rate, the guidance is that the ZAR stands a good chance of appreciating in the coming months.

  • The ZAR is only slightly undervalued on a nominal PPP-adjusted basis, although it is worth noting that this masks its near-15% undervaluation against the USD specifically. This dynamic reflects just how overvalued the USD is in general at current levels, with the ZAR ready to capitalise on any potential correction.
  • Given its relative undervaluation, the ZAR is also once again better positioned to respond to fundamental drivers, while its propensity to sell off further has also dissipated.

  • Even when adjusted for risk, the ZAR is undervalued against the USD. Although this undervaluation is not looking extremely stretched as yet, the ZAR is still a long way away from risk-adjusted fair value around R15.2000/$-R15.5000/$.
  • The further the USD-ZAR deviates from this range, the more uncomfortable traders are likely to become, suggesting this is an opportune moment for exporters to take advantage and lock in attractive forward rates.

  • The ZAR’s overall resilience continues to be undermined by declining fundamentals and SA’s fiscal weakness. In turn, these have both been weakened by persistent economic headwinds such as loadshedding, a difficult investment climate, and, more recently, falling metals prices.
  • On the monetary front, the SARB’s efforts to curb inflation may provide the ZAR’s resilience with a boost, although it will likely remain vulnerable to the broader ebb and flow of market sentiment.

  • The ZAR remains amongst the most attractive currencies from a carry trade perspective, scoring well above both the EM and DM averages. This is largely a function of the ZAR’s undervaluation on a PPP-adjusted basis, SA’s large current account surplus, and the country’s relatively high real interest rates.
  • It implies that the ZAR still stands to attract foreign interest, which, at the margin, will assist in helping the ZAR retain some resilience.

  • Speculators continue to hold a net long position on the USD, although the size thereof is not large enough to justify the kind of appreciation the greenback has been subject to recently.
  • There is a clear disconnect between the value of the USD and the market’s net speculative position on it. Add to that the slight reduction in the number of speculative long positions recently, and a correction in the USD appears justified.


  • SA’s terms of trade have deteriorated notably in recent weeks due to high oil prices (SA’s biggest import) and falling metals prices. That being said, the terms of trade are still significantly higher than they were at the start of the pandemic, and continue to provide the ZAR with some support.
  • Should terms of trade continue to drop, however, the ZAR may lose one of its most important post-pandemic buttresses, with this worth keeping an eye on.

  • ETM’s inflation risk index remains elevated, but is not yet pointing to any risk of runaway inflation in SA. This is largely due to the SARB’s prudent stance towards monetary policy, as well as SA’s weak demand dynamics.
  • That being said, there are some inflationary risks emerging now that the government has removed the fuel levy reprieve. Should fuel prices adjust aggressively through H2, inflation prints may experience a short-term spike.


  • As the SARB has alluded to many times this year, the pass-through of USD-ZAR exchange-rate changes on consumer inflation is still relatively low. This follows as money supply growth in SA remains relatively subdued, meaning price shocks tend to be more recessionary than inflationary.
  • At the same time, the ZAR is not doing much to help contain the rise in inflation. However, a sustained selloff would be needed for a more material impact on inflation.

  • Growth in private-sector credit extension (PSCE) has accelerated alongside an improvement in import demand, owing to a tentative economic recovery in SA. In turn, this has detracted from SA’s trade surplus.
  • However, a surplus it remains, with cross-border flows still highly ZAR-supportive at this time. How long that remains the case going forward will likely depend on commodity prices, and could affect the ZAR significantly.

  • While government fixed investment is falling, as reflected by the blue line, private sector capital formation is on the rise. This would be in keeping with the general direction of reforms that the government is targeting, aimed at consolidating the fiscus and bringing in the private sector to pick up the shortfall.
  • However, it does reflect the structurally weak backdrop that constrains SA’s economic growth and which will detract from import demand. This means pressure on the ZAR remains subdued, and will continue to until demand dynamics improve materially.