Bottom Line:

  • A number of indicators are turning more ZAR supportive. The ZSI has surged to levels synonymous with ZAR appreciation, the ZAR has retained its carry attractiveness and the  ZAR’s valuation metrics are screaming value for exporters. Add to that the fact that the USD is coming under considerable pressure and the stars are aligning for a phase of ongoing ZAR strength.
  • Some of the negatives include the possibility that the trade account could narrow due to deteriorating terms of trade and an accelerating credit cycle. However, those negatives are likely to be outweighed by the other drivers of ZAR and the expectation that the USD will unwind a lot of its overvaluation through the course of 2023. At more than 20% undervalued, the USD could depreciate by as much as 15% and still be overvalued.


Baseline View:

Just as the ZAR succumbed to USD strength in recent months, it will likely regain lost ground off the back of the current phase of USD weakness. Furthermore, the USD looks set to lose a lot more ground through the year ahead, implying that the ZAR may well stage a sustained and robust recovery from current levels, especially if investors begin to price in the prospect that the Fed will ease its tightening or even pause.


  • Through the past month, the ZSI has continued to surged to fresh 2yr highs. It offers a clear indication that investors are not prepared to hedge themselves against further ZAR weakness from current levels.
  • The indicators are now predicting that the ZAR will have a very powerful start to the year and steadily appreciate to levels back below 15.00/dlr before the middle of the year.

  • Notwithstanding the recent retreat, the trade weighted USD continues to trade at very expensive levels, last seen in the early 1980s. Historically, these levels have been difficult to sustain and there is no reason to believe that this time will be any different.
  • The USD has surged on expectations of higher rates relative to its trading partners and that expectation has now moderated.

  • A new addition to the FX dashboard is a model that gives corporates a very clear view of when is a better time to cover forward. The dark orange informs exporters to cover forward. The dark green tells importers when they cover their exposures. At the moment, exporters should still be covering their exposures forward.
  • Yellow is a less convicted assessment of exporter value. Light green reflects a less convicted assessment of importer value.

  • This chart reflects the risk adjusted assessment of spot vs fair value (red line). The ZAR is far removed from fair value and clearly offering exporters some value.
  • Risk adjusted fair value currently stands closer to 16.00/dlr, implying a fairly dramatic appreciation is still possible even though the ZAR has appreciated.
  • If one believes that the ZAR could briefly swing into overvalued territory, then levels back below 15.00/dlr are even possible. The risk assessment is the observed risk priced into the market over nominal fair value

  • Two things stand out from the latest run of the resilience model. On the one hand, the monetary rectitude score has risen to nearly 5/10 to reflect the SARB’s conservative stance and rate hikes.
  • The other is that SA’s fiscal risk has not dissipated despite the MTBPS revealing a smaller than expected budget deficit and lower debt trajectory. It may be that the market simply does not believe National Treasury or that it is also pricing in the prospect of more SOE bailouts.

  • There have been no major changes to the ZAR’s carry attractiveness score, but the most important finding is that the ZAR still ranks higher than both EM and DM averages. It implies that the ZAR still holds some attraction for foreigners and enjoys some support.
  • Key to that support has been the rate hikes that have bolstered money market and bond yields, which is a function of a SARB that remains conservative in its stance and determined to protect the value of the ZAR.

  • In recent weeks there has been a significant change to the speculative support that the USD is attracting. Recent CFTC data shows that the speculative long USD positions have shrunk considerably.
  • Typically that implies that support for the USD will fade and that the trade weighted USD will become more vulnerable to sell-offs. This week reflects the start of that process.

  • SA’s commodity terms of trade are back under considerable pressure. They have slid back to levels last seen in the early stages of the pandemic. Some of the slide back down has been a function of the strength of the USD, and some of it a function of weaker global growth dynamics.
  • Looking ahead, terms of trade might stabilise should the weaker USD translate into higher commodity prices that help offset weakening demand conditions.

  • The most significant development in this data is that the underlying momentum behind inflation has turned negative, pointing to disinflation. Typically, this is synonymous with softening inflation in the months that follow.
  • Weaker inflation dynamics are associated with more fundamentally robust support for the ZAR over the medium to longer term.

  • The threat of the trade surplus turning into a deficit has receded with the latest trade data that reflected another healthy surplus. Whether that is sustained or not will determine just how supported the ZAR will be.
  • Through the months ahead, we would expect to see the trade surplus narrow on the back of weaker demand for SA’s exports and more subdued commodity prices.