Key points
- The USD is significantly overvalued, indicating structural vulnerability. Simultaneously, the US business cycle is turning, leading to expectations for the Federal Reserve to cut interest rates in the coming quarters.
- The 2024 US election year brings some political uncertainty, which could increase market volatility. Similarly, the potential for US equity market corrections could also drive heightened market volatility into the end of the year. This notwithstanding, the USD is expected to weaken due to its inherent vulnerabilities.
- The ZAR is poised to benefit from the USD’s likely correction, especially if the new South African government implements reformist policies as anticipated.
Baseline view:
The USD is structurally and cyclically vulnerable. While political uncertainty surrounding the US elections in November and potential for further equity-market corrections could lead to USD-supportive market volatility into the end of the year, the broader balance of risks remains tilted against the dollar.
For its part, the ZAR is poised to capitalise on any would-be USD correction. Sentiment towards SA has improved notably in recent months, and the ZAR could recover further should the new government implement much-needed reformist policies.
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