SARB’s inflation efforts are key to helping ZAR

Key points

• ETM’s carry attractiveness index shows that SA leads the rankings compared to twenty-one countries. Near the bottom of the rankings are some major currencies, including the USD, the EUR and the GBP. This suggests that SA’s interest rates are trading at enough discount to boost the ZAR’s carry attractiveness.
• One of the subcomponents that make up carry attractiveness is, of course, the base level of interest rates. However, monetary policy is a significant factor driving the interest rate cycle, and the base level of inflation significantly guides monetary policy. The higher the level of inflation, the higher the interest rate needs to be for the SARB to regain control of prices.
• Focusing on real yields, carry attractiveness, and the degree of interest in exposure to SA interest rates offers some insight into how the ZAR might perform in the future. Today’s article offers some perspective on this specific dynamic, which will help strengthen the argument for why the ZAR might prove more resilient than many would anticipate given the country’s economic fundamentals.

Baseline view

This assessment concludes that the ZAR is slightly overvalued compared with a purchasing power parity valuation study, which suggests that current levels are more favourable for importers. That is an intriguing opportunity for importers who are constantly trying to minimise the damage of a weaker ZAR most of the time. These are more favourable periods for importers to cover forward, and the opportunity will become even more obvious with any further incremental ZAR strength that might materialise from current levels.

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