Bottom Line:

  • Since the previous report, the ZAR has had a tough time vs the USD. Against the likes of the EUR and the GBP, it has held its own and is trading close to fair value, but against the USD, the ZAR has deviated significantly from fair value. This raises a tremendous opportunity for exporters that will be able to repatriate their USDs back into ZAR at levels far higher than what they costed for in their budgets at the start of the year.
  • Such high USD-ZAR levels are unlikely to persist indefinitely. The movement is cyclical and mainly a function of the USD’s strength, which now finds itself in extremely expensive and stretched territory. A set of economic consequences and responses will now follow to sow the seeds of its reversal weaker. With so much priced into the USD, the risk is asymmetrically turning against it. Should the Fed soften its stance, the USD may come under pressure which might explain why so many of the indicators which follow allude to the possibility that the ZAR may perform well against the USD through 2023.

Baseline View:

The ZAR’s current blow-off against the USD is more a function of USD strength than ZAR weakness. The ZAR retains some resilience and attractiveness and exporters would do well to take advantage of the current weakness of the ZAR to the USD, even if there is a chance that the ZAR could temporarily spike even weaker from here.



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.





  • The ZSI has surged to a near two-year high and confounded investors who had anticipated the opposite given recent events. The professional market is reluctant to hedge aggressively against further ZAR weakness from current levels and is instead, positioning for the possibility that the ZAR will make a strong recovery through 2023.
  • Implying the levels from the ZSI, the ZAR holds the potential to recover back to the risk-adjusted fair value level of R16.00/dlr at the very least and holds the potential to strengthen even more than that.





  • The trade-weighted USD finds itself in extremely overvalued territory. The driving force behind the strength has been the Fed’s persistent and aggressive monetary policy stance which has driven divergence to other major central banks.
  • In addition, financial market volatility and the uncertain geopolitical climate has generated a rotation to safety and this has translated into an impressive performance by the USD since the start of the pandemic.
  • The USD is stretched and the risk of a reversal has risen significantly, especially if US data softens and the Fed backs down from aggressive rate hikes.




  • Portfolio flows as a trend have been negative for SA for some time. Foreign holdings of SA bonds have now slipped to under 27% which is a significant moderation from the more than 40% in 2018. That is a function of SA slipping below investment grade but reduces a significant risk.
  • With bond holdings substantially lower, the pressure that might be exerted from foreigners may not be as acute as it may have been previously.





  • The risk-adjusted valuation of the ZAR places it in extremely undervalued territory relative to the USD. Although that may be a function of the strength in the USD rather than weakness in the ZAR, such levels historically have been difficult to sustain.
  • ETM’s value assessment model suggests that over the medium to longer-term, this is an opportune time to sell USDs.




  • Two notable changes are evident from the current chart. The first is the deterioration of the fundamentals score as the economy slows due to weak external growth, high inflation and rising interest rates.
  • However, the second notable change is the concomitant rise in monetary rectitude as the SARB turns conservative in its monetary policy stance. Barring a sharp decline in fundamentals and SA’s fiscal score, conservative monetary policy will support the ZAR’s resilience.




  • Thanks to the rate hikes of central banks around the globe, carry attractiveness scores have all risen. Given that the SARB has matched the Fed and other central banks with rate hikes, SA’s carry attractiveness score has risen back above 5/10 and will continue to lend the ZAR some support.
  • Most notable in this chart is that the ZAR carry attractiveness score remains higher than the average of either emerging markets or developed markets and will play a role in helping the ZAR stage a recovery through 2023.




  • 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, although there are signs that the net long positions are shrinking.
  • 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.



  • Although SA’s commodity terms of trade may be off their best levels, they remain substantially higher than they were before Covid. Commodity prices have held up despite concerns about the slowdown in global growth.
  • The resilience of SA’s terms of trade mean that the ZAR is likely to enjoy ongoing support for a little while longer through the positive impact this will have on SA’s trade and current accounts that may now sustain their surplus for longer.




  • Momentum behind SA’s inflation is slowing. ETM’s inflation risk index has dipped marginally below the zero bound, implying that price pressures are no longer inflationary. It suggests that inflationary pressures will soon subside and that the worst of the current inflation episode may be behind us.
  • Given that inflation differentials tend to govern the performance of FX pairs, SA’s relatively softer inflation should lend the ZAR fundamental support.



  • Disappointingly, the trade surplus has narrowed significantly. Although it remains in surplus, the trade account at these levels does not generate much support for the ZAR. It would need to widen back out for that to be the case.
  • With SA’s terms of trade improving once more and the credit cycle turning weaker to reflect weaker demand for imports, the potential for the trade account to widen back out again should not be underestimated.