ZAR to find support as carry trades come back in vogue

Key points

• Global economic indicators are converging to signal an approaching growth inflection point, with traditional recession predictors flashing warning signs and the US economy showing mounting vulnerabilities that historically precede meaningful downturns.
• The anticipated economic slowdown will likely trigger substantial monetary accommodation from major central banks, flooding the system with liquidity that systematically seeks higher-yielding emerging market opportunities as carry trade strategies regain favour.
• The ZAR is exceptionally well-positioned to capitalise on this shift, ranking second out of 22 countries in ETM’s Carry Attractiveness framework, supported by attractive real yield premiums, improving terms of trade, and the SARB’s measured policy approach relative to more aggressive central banks globally.

Baseline view

As the global business and credit cycles approach a critical turning point, the ZAR stands to benefit significantly from renewed carry trade activity. The combination of an impending US economic downturn, subsequent central bank policy accommodation, and South Africa’s superior yield premium creates a compelling backdrop for ZAR strength. With the Japanese yen resuming its funding currency role and global liquidity cycles poised to turn higher, the ZAR’s elevated carry attractiveness ranking positions it as a primary beneficiary of the search-for-yield dynamics that typically emerge during monetary easing cycles.

 

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