Bottom Line:

  • Last week, the SARB held rates on hold. The question at the time was whether the ZAR would be able to sustain its recent gains should the Fed and the ECB both hike. The answer is now clear, the ZAR has sustained those gains and proven to be one of the more resilient currencies despite both hiking by 25bp in recent days.
  • The answer as to why, relates to investors looking through the cycle and positioning for the possibility that interest rates and inflation are at an inflection point and about to trend lower. There is indeed good justification for this and investors are turning more convinced that the next two years will see a change in monetary policy stances. For SA, that implies that there may be more room for a ZAR recovery.

Conclusion: As the inflation and credit cycle turn, so the ZAR looks set to benefit from a bond market that may well outperform the equity market and attract foreign portfolio flows. The stronger the degree of inflows, the greater the probability that the ZAR will recover. A virtuous cycle now appears to be underway and the ZAR should enjoy a stronger end to an otherwise tumultuous year.