The ZAR’s recent performance has been impressive and now ranks as the top-performing emerging market currency. Although there has been a recent appreciative bias across other emerging market currencies, the ZAR’s performance has stood out.
One could argue that the ZAR needed to catch up because last year’s performance was poor. After all, in the run-up to the elections, there was a barrage of negative press, load shedding was incessant, SA’s geopolitical stance on Russia and Israel attracted criticism, the economy was floundering, and the fiscal authorities appeared to have lost control.
Roll forward to now, and a lot has changed. The election outcome was much better than expected, sentiment improved considerably, and offshore conditions changed in a way that underpins high-risk commodity currencies like the ZAR. The performance of the ZAR reflects the start of a virtuous cycle that has much further to run.
BASELINE VIEW:
Should SA’s government progress in implementing much-needed reforms and encourage private sector participation, which bolsters fixed investment, the ZAR can appreciate even further. The prospects for the next 6-9 months look good for the ZAR to trade into overvalued territory.
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