Bottom Line:

ETM’s ZAR indicators remain a mixed bag, reflecting a market facing severe uncertainty and lacking any clear-cut directional bias. Some indicators point to ZAR resilience, especially in the near term, while others allude to some longer-term vulnerability. Investors in the market appear to be confused, forecasts are proving challenging, and there is an awful lot of unclear economic data to work with.

Add to that the uncertainty of major central banks unwinding enormous amounts of monetary stimulus and the impact that will have on asset prices, and it is difficult to make a clear judgement call on what that implies for currency direction. However, while any trends at present lack clear substance, there is reason to believe the ZAR may trade resiliently in the near term, but struggle to sustain gains over the longer term.

Baseline View:
Investors need to consider a range of uncertainties that keep the currency from adopting any clear-cut direction. Trends do not appear to have substance and themes such as inflation, monetary policy normalisation, and supply chain logistics are still distorting financial market and economic dynamics. The dust will settle as the year unfolds, and the tide may shift against the ZAR, on balance.


ZAR Sentiment Indicator (ZSI):

After rising sharply back into positive territory during the early stages of the year, the ZSI has turned lower towards neutral territory as the ZAR recovered off the lows seen at the back-end of 2021. This suggests that traders in the derivatives market appear more comfortable with the ZAR at current levels than what they did when it was trading north of R16.0000/$.

The ZSI sitting at neutral while the ZAR trades between R15.0000 and R15.5000 suggests the currency is expected to trade within this range towards the back-end of the year, notwithstanding potential breaks out between now and then.


Headline Resilience Indices:

A tumultuous start to 2022 means the ZAR’s Resilience score has deteriorated slightly as many of the ETM Resilience Framework’s inputs have been subject to a high degree of volatility. The broader trend remains to the topside, however, with the ZAR already proving its improving resilience during the Ukraine war.

With the SARB set to raise the Repo rate in the months ahead to curb inflationary pressures, SA’s Monetary Rectitude will improve. Surging commodity prices will also support SA’s Fundamentals, adding to the ZAR’s attractiveness in times of market stress. Finally, SA’s Fiscal Risks remain concerning, although recent intimations from National Treasury suggest there are reforms in the pipeline.


Carry Attractiveness Index:

Although the ZAR is less undervalued than it was at the back-end of last year, it remains very attractive from a carry perspective. This is due SA’s high yields, strong terms of trade, and improving optics on the reform front.

The ZAR’s carry attractiveness score remains near the top of the table, elevated above the EM and DM averages. Accordingly, the ZAR will continue to enjoy support, while investors will do well to take advantage of the returns on offer.


Rand Real Effective Exchange Rate:

Compared to the end of last year, the ZAR has performed very well through the early stages of 2022. Its real effective exchange rate (REER) is now undervalued by just 12%, which is an improvement from the previous 15%+ undervaluation.

While SA’s risks still warrant a ZAR discount, the improving REER highlights the amount of negative news already priced in and suggests that the need for the ZAR to depreciate significantly further from current levels should be reassessed.


Net Long USD:

Speculators remain net long USDs, although compared to the previous report a month ago, the long USD positioning has been trimmed. Despite this, the USD has been on a tear recently, owing to severe risk aversion over the Russia-Ukraine war, and persistent bets for aggressive Fed tightening.

Looking forward, there is a lot priced into the USD, with longer-term risks increasingly tilted to the downside.


SA Inflation Risk Index:

After rising into the new year to suggest higher levels of inflation lie ahead, the inflation risk index has consolidated recently as the ZAR has appreciated. The index is not yet pointing to any risk of runaway inflation in SA, owing to the SARB’s prudent and conservative stance towards monetary policy.

That being said, there are significant risks emerging from the Russia-Ukraine war and high oil prices, which could drive inflation higher in the months ahead.


Inflation-ZAR Pass-Through:

As the SARB has alluded to many times at recent meetings, the pass-through of USD-ZAR exchange-rate changes on consumer inflation is still relatively low. This follows as money supply growth in SA remains subdued, meaning price shocks tend to be more recessionary than inflationary.

However, there is some scope for inflation to accelerate in the months ahead, although runaway inflation remains improbable at this time.


ZAR Commodity Terms Of Trade Index:

SA’s surging terms of trade (ToT) go a long way in explaining the ZAR resilient performance recently against a backdrop of broader risk-off trading conditions. The Citi ToT index is currently at highs last seen during the GFC, with commodities booming across the board.

Rising metals and agri prices are helping offset high oil prices, but the risk is that oil remains elevated even after the Russia-Ukraine war concludes.


South Africa Trade Balance vs Private Sector Credit Extension:

As growth in private-sector credit extension (PSCE) accelerates, import demand looks set to increase. This will be weighed against SA’s impressive export performance of late, but may knock the ZAR’s resilience in the months ahead if SA’s trade surplus continues to narrow.

Even though SA’s terms of trade are very strong at present, the trade surplus looks set to deteriorate through 2022.


SA Expenditure Approach, Gross Fixed Capital Formations:

There are growing signs of recovery in gross fixed capital formation (GFCF) in SA, with private sector investment on the rise as investor sentiment stabilises. There are still significant structural risks on the horizon, however, meaning this recovery is tentative at best.

Nevertheless, should investment continue to recover, this would weigh on the trade surplus and remove further underlying support for the ZAR.