Bottom Line:

  • Since the previous report, the ZAR has staged a significant recovery against the USD. It has appreciated away from the R17.0000/$ handle and is now trading closer to R16.3000/$. The market appears to have grown uncomfortable with the USD’s stretched overvaluation, with an element of doubt setting in over the Fed’s resolve to maintain high interest rates into the teeth of a recession.
  • Although the ZAR still has a very long way to go to retrace all of its second-and third-quarter losses, ETM’s proprietary models suggest that the balance of risks is tilted in favour of a volatile recovery continuing into the end of the year. The ZSI remains in positive territory, SA’s carry attractiveness is high, commodity terms of trade are still positive, and the prospects for SA’s economy are weak. Moreover, the ZAR remains undervalued on a nominal PPP-adjusted basis, and even more so against an extremely overbought USD. Accordingly, exporters might do well to take advantage of current trading levels by locking in attractive forward rates.

Baseline View:

The ZAR’s recent recovery may have marked a notable shift in market momentum. While there are still plenty of global headwinds that may continue to trigger rotations into the USD from time to time, the ZAR is poised for a strong, albeit volatile, rebound into the end of the year.



It is often useful to find a tool that helps unpack value ranges quantitatively, preventing emotional decision-making when hedging. Traditionally, understanding value has been a somewhat nebulous concept that comes down to a range of factors, including what kind of tolerance a business has for unfavourable currency movements. The indicators that follow attempt to identify different periods that might offer relative value, either for importers or for exporters.

ZAR Sentiment Indicator (ZSI)

  • The ZSI has surged to a fresh one-year high and is pointing to a ZAR that will gradually recover into 2023. Although there have been periods of disconnect historically, the ZSI has accurately picked direction in the ZAR over the past two years and should therefore be taken seriously.
  • Traders in the derivatives markets clearly view the asymmetry of the risk profile of establishing a long USD-ZAR position from current levels as high and rising, with the ZAR poised to take advantage of any signs of USD vulnerability.


ZSI implied rand levels

  • Spot USD-ZAR levels as implied by the ZSI model remain well below the current price, suggesting that the underlying bias in the market continues to favour ZAR appreciation.
  • Note, however, that these implied levels should not be treated as specific spot levels to target, but rather as an indication of the balance of risks facing the USD-ZAR. As things currently stand, the ZAR looks set to appreciate in the coming months.


Rand real effective exchange rate

  • The ZAR is only slightly undervalued on a nominal PPP-adjusted basis, although it is worth noting that this masks its near -15% undervaluation against the USD specifically. This dynamic reflects just how overvalued the USD is, in general, at current levels, with the ZAR ready to capitalise on any potential correction.
  • Given its relative undervaluation, the ZAR is also once again better positioned to respond to fundamental drivers, while its propensity to sell off has also dissipated.


ZAR spot relative to historical valuation range

  • Although the ZAR’s recent appreciation has brought it closer to fair value, it remains undervalued against the USD on a risk-adjusted basis.
  • This undervaluation is not extremely stretched, but the ZAR is still a long way away from fair value around R15.5000/$. This adds to the argument against ZAR depreciation in the months ahead, with investors generally uncomfortable trading the ZAR too far away from fair value.


ZAR headline resilience indices

  • In an environment of tightening global financing conditions, SA’s fiscal risks continue to undermine the ZAR’s overall resilience.
  • Declining trade fundamentals are also beginning to take a more significant toll, but, for the most part, high commodity exports remain supportive.
  • On the monetary front, the SARB’s efforts to curb inflation have supported the ZAR’s resilience, although it generally remains vulnerable to external shocks.

Carry attractiveness index

  • From a carry trade perspective, the ZAR remains amongst the most attractive currencies in the world, scoring well above the emerging and developed markets averages. This is largely a function of the ZAR’s undervaluation on a PPP-adjusted basis, SA’s large current account surplus, and the high real yields on offer in SA.
  • Accordingly, the ZAR may continue to attract foreign interest, which, at the margin, will assist in helping it retain some resilience against shifts in sentiment.


USD net position

  • Although speculators continue to hold a net long position on the USD, a clear disconnect between its spot value and the market’s net speculative position on it persists.
  • There is also reason to believe that the peak for the USD net position may have been reached for this cycle, meaning it is looking increasingly vulnerable to correction from extremely overvalued levels.


ZAR commodity terms of trade

  • Through the course of the past month, SA’s terms of trade have consolidated. Although well below their highs, terms of trade are still well above the levels last seen at the start of 2020 and remain broadly supportive of the ZAR’s appreciation.
  • SA’s trade balance has started coming under pressure as a result, further squeezed by the strengthening credit cycle supporting demand for imports.


SA inflation risk index

  • Inflation currently remains elevated. ETM’s inflation risk indicator remains well above the breakeven mark to confirm that price pressures remain elevated. That being said, SA’s inflation is not a runaway problem and there are early indications that the inflation tide has already turned.
  • As oil prices moderate, the ZAR recovers and the credit cycle remains constrained, the probability is high that the red inflation reading will moderate to more normalized levels.


Inflation-ZAR pass-through 

  • As the SARB has alluded to many times this year, 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 relatively subdued, meaning price shocks tend to be more recessionary than inflationary.
  • USD-ZAR at the moment is not adding significantly to the price pressures and with internal ETM indicators pointing to ZAR appreciation, the prospect that inflation remains contained is high. Softer inflation fundamentally supports ZAR.


Imports & Exports

  • Gradually, SA’s trade surplus is compressing, mainly as a result of imports accelerating at a faster pace than exports, although both are thankfully expanding. That is an indictment of the troubles the country has had logistically and in dealing with electricity capacity constraints.
  • SA has not been able to fully harness the benefits of the strong commodity cycle, and now the opportunity might be lost as commodity prices retreat.


Fixed investment

  • The private sector has been the primary driver of any improvement in fixed investment. With Operation Vulindlela currently underway, and the focus shifting firmly on to infrastructural investment, there is opportunity for the private sector to pick up much of the slack left by the dysfunctional SOEs in a form of quasi-privatisation. This should be seen as ZAR supportive if it implies there will be inflows from abroad to take advantage of the opportunity and the fiscus is spared the brunt of the financing.