Summary:
- Moody’s offers quite downbeat comments on the South African economy
- Maintaining longs on USDZAR results in a punishment from the upward-sloping forward curve
- Rand moves down against the US dollar, trade war concerns may weigh on the currency as well
The South African rand is among the weakest EM currencies on Wednesday as investors are digesting comments offered by Moody’s rating agency. It said yesterday that the South African’s move to allow land expropriation without compensation could deter investment and added to political uncertainties preventing a recovery of sentiment. Bear in mind that the agency will review the country’s credit assessment in October. As a result, the ZAR is losing almost 0.9% as of 11:15 am BST being the weakest among the most traded EM currencies in the world.
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The upward-sloping forward points curve on USDZAR favours longs on the rand. Source: Bloomberg, XTB Research
Having regard to the latest comments from the South African central bank about possible rate hikes in the foreseeable future aimed at dealing with a pass-through from the weak ZAR one may consider that entering a long on ZAR could look encouragingly. On top of this, one needs to be aware that the forward points curve is not supportive of USDZAR buyers. For one, buying and keeping a long on the cross through a year demands to see a 4.7% increase just to offset an adverse effect coming from the upward-sloping forward curve. Of course, it’s tremendously less when we weigh this result against roughly 20% in case of the Turkish lira, nevertheless risks (both political per se and those regarding monetary policy) surrounding the TRY seem to be much more pronounced.
Having said that, buying the ZAR appears to be burdened with risks associated with trade tensions as it has tended to weaken when harsh rhetoric from Donald Trump has occurred. Either way, the rand still looks quite interestingly from a technical standpoint, and the outlook for monetary policy has improved lately too. What should investors watch in the days ahead? Tomorrow will see a PPI release for May and higher numbers could naturally result in a bit more confidence with respect to a rate increase in the near-term. In turn, on 2 July there will be a manufacturing PMI reading.
Technically the pair drew a shooting star candlestick last week, and it occurred nearby a strong technical resistance enhancing its meaning. Therefore, as for now it looks as if any spikes could be faded, but if not do expect the central bank to intervene verbally setting the stage for a rate increase and thereby injecting life into the ZAR anew. Source: xStation5
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