The commodity price slump is hitting the South African rand more than most currencies
South Africa’s rand, or ZAR, is certain to
fall according to Peter Kinsella, head of research on emerging market
economies and currencies at Commerzbank.
“The combination of commodity price declines, a widening current account deficit and higher expected inflation implies that further ZAR weakness is inevitable,” he writes.
Kinsella argues that the ongoing commodity price slump affects the rand more than most currencies. “As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” he writes.
Moreover, South Africa persistently runs a sizeable current account deficit, which is expected to widen towards 4.5% of GDP over the coming quarters. “This makes South Africa and ZAR vulnerable to an increase in external financing costs, which is exactly what manifests at present with higher US interest rates,” he writes.
“In the event of materially higher US interest rates, this poses a key risk for ZAR. In addition to this, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests,” he adds.
As for the country’s central bank, the South African Reserve Bank, it surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive, writes Kinsella.
South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months. The only risk to the above scenario is if the Fed takes note of the current emerging market jitters and refrains from hiking rates over the coming months. This could lead to some brief respite for ZAR. We illustrate a strategy which will protect investors’ interests in both cases.”
Kinsella’s recommendation is a “forward plus” in the euro/rand currency cross. “ZAR buyers are hedged at current spot prices and benefit if EUR/ZAR appreciates towards 19.00,” he writes.
The cross rate was trading at 17.3890 at midday on Friday.
This post previously appeared on news.markets: https://news.markets/forex/rand-weakness-inevitable-says-commerzbank-economist-8092/
“The combination of commodity price declines, a widening current account deficit and higher expected inflation implies that further ZAR weakness is inevitable,” he writes.
Kinsella argues that the ongoing commodity price slump affects the rand more than most currencies. “As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” he writes.
Moreover, South Africa persistently runs a sizeable current account deficit, which is expected to widen towards 4.5% of GDP over the coming quarters. “This makes South Africa and ZAR vulnerable to an increase in external financing costs, which is exactly what manifests at present with higher US interest rates,” he writes.
“In the event of materially higher US interest rates, this poses a key risk for ZAR. In addition to this, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests,” he adds.
As for the country’s central bank, the South African Reserve Bank, it surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive, writes Kinsella.
South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months. The only risk to the above scenario is if the Fed takes note of the current emerging market jitters and refrains from hiking rates over the coming months. This could lead to some brief respite for ZAR. We illustrate a strategy which will protect investors’ interests in both cases.”
Kinsella’s recommendation is a “forward plus” in the euro/rand currency cross. “ZAR buyers are hedged at current spot prices and benefit if EUR/ZAR appreciates towards 19.00,” he writes.
The cross rate was trading at 17.3890 at midday on Friday.
This post previously appeared on news.markets: https://news.markets/forex/rand-weakness-inevitable-says-commerzbank-economist-8092/
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