Bottom Line

  • A number of indicators remain ZAR supportive. The ZSI continues to increase and is now pointing to a period of significant ZAR outperformance. The ZAR’s resilience scores have also improved while its carry attractiveness remains high. Add to all of this the fact that the USD is coming under considerable pressure and the stars are aligning for a phase of ongoing ZAR strength.
  • It is not all positive, however, but for now, the signs pointing to ZAR appreciation or support are outweighing those that would detract from the currency’s performance going forward. There is the possibility that the trade account surplus could narrow and the current account shifts into a more sustained deficit. Nevertheless, signs are pointing towards an alignment of some strong local factors and external pressures on the USD which will put the ZAR in a strong position through most of 2023.

Baseline View


  • Although the ZAR has had a volatile few weeks now, the fundamental picture remains largely ZAR positive. 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 look past any near-term political noise. With that in mind, now represents an opportune time for exporters to cover forward.

ETM ZAR Sentiment Indicator (ZSI)

  • Through the past month, the ZSI has continued to surge. 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 in 2023 and steadily appreciate to levels back below 15.00/dlr before the middle of the year.

United States, BIS, REER Index, Narrow

  • 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 unwind of the dollar’s overvaluation has begun and will likely accelerate through 2023, providing global FX markets a boost.

Market Phase ZAR/USD valuation signal

  • Revisiting our new addition to the FX dashboard is the 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 should cover their exposures.
  • It is clear that now is still an opportune time for exporters to cover forward and lock in the attractive rates currently on offer. Even with some ZAR appreciation over the next few weeks, exporters would still be favoured to cover forward.

ZAR spot relative to historical valuation range

  • 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, especially from current levels.
  • 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.

ZAR headline resilience indices

  • Although the monetary rectitude score has increased to almost 5 in recent months, the ZAR’s fundamental and fiscal rectitude scores have weakened. The fiscal score shows that despite what was a relatively positive MTBPS, the market does not see any easing of fiscal stress going forward, likely a result of expected bailouts to SOEs.
  • The fundamental score, meanwhile, reflects SA’s weakening trade and current account balances, offsetting the increase in monetary rectitude.

Carry attractiveness index

  • The ZAR’s carry attractiveness score has been rising as the SARB continues to hike rates and as implied volatility levels subside into the end of the year. The ZAR still ranks higher than both EM and DM averages and thus the ZAR still holds some attraction for foreigners looking to take advantage of carry returns.
  • 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.

Non-commercial net USD long/short vs DXY aggregate net speculative position of futures market in $ billions vs DXY future

  • 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 position on the USD has shifted to net bearish.
  • History also shows us that once the net position turns bearish, it deepens significantly before reversing course once again. This suggests that a phase of sustained USD weakness is nearing.

ZAR commodity terms of trade index

  • SA’s commodity terms of trade has rebounded after slipping back to levels last seen in the early stages of the pandemic. Weakness in oil prices recently has supported this, while metals prices have recovered owing to China’s reopening.
  • Looking ahead, terms of trade might improve further should the weaker USD translate into higher commodity prices that help offset weakening demand conditions.

SA inflation risk index

  • Our proprietary inflation risk measure shows that the underlying momentum behind general inflation is receding, which suggests that the bias is to shift towards disinflation. The index currently points to headline inflation falling back towards the SARB’s target range within the coming months.
  • Weaker inflation dynamics are associated with more fundamentally robust support for the ZAR over the medium to longer term.

SA, imports & exports

  • The threat of the trade surplus turning into a deficit has increased once again after the October trade data showed a deficit of -R4.3bn. Cumulatively, SA still holds a notable surplus for 2022, but how long this remains the case is questionable given weakening external demand.
  • A shift back towards a more sustained deficit would remove a key pillar of support that the ZAR has recently enjoyed.