“ZAR leads underperformance as local repricing of Delta risks remains,” says Rui Ding, an analyst at Citi.
The rule of thumb when it comes to Covid economics is that the longer restrictions last the more damaging they become economically as irreversible structural breakdowns begin to occur. The South African government on Sunday extended restrictions for another 14 days, maintaining rules that include a ban on gatherings, a curfew from 9 p.m. to 4 a.m., and a prohibition on the sale of alcohol. “The ZAR’s appreciation trend appears to have halted. Tighter restrictions because of a new wave of COVID-19 cases,” says Paul Mackel, Head of FX Research at HSBC. For the Rand, “the Covid risk premium remains valid with Ramaphosa extending bans on alcohol sales and most public gatherings for two weeks on Sunday,” says Ding. It is not just South Africa that is seeing a surge in Covid-19 cases as the highly transmissible Delta variant is causing cases to rise in Europe and Asia.
This is in turn being reflected in softer global markets and commodity prices, with a spike of cases in southern China being blamed in part for slowing in economic activity in the world’s second-largest economy. The combination of softening investor sentiment and lower commodity prices are in turn a headwind for the Rand, which tends to benefit when investors are optimistic and the cost of South Africa’s raw material exports are elevated.
Citi thinks that the latest risk-off episode has probably mostly run its course, as they expect:
i) the impact of the Delta variant on markets to be limited,
ii) the global recovery to remain in place.
iii) central bank policy to be data-dependent and able to pivot if needed, but of course, some risks remain.
HSBC’s Mackel says in a monthly foreign exchange research briefing note that his team does not see strong fundamental reasons to be excessively pessimistic on the ZAR for the second part of the year. “Recent leading indicators suggest limited damage to the economy stemming from the new restrictions, the trade balance surplus remains sizeable and the SARB is likely to start policy normalization before year-end,” says Mackel. Another potential trigger to a Rand recovery could come in the form of investor expectations regarding the U.S. Federal Reserve, which has proved something of a handbrake to the global growth of late.
The Fed appears intent on reducing the levels of support it provides the U.S. economy, which in turn has knock-on effects for the global economy. In anticipation of a higher interest rate regime in the U.S., the yield paid on U.S. sovereign and corporate bonds has risen.
However, Derek Halpenny, head of research, global markets EMEA and international securities at MUFG, says this source of weakness for the Rand could soon come to pass.
GBP/ZAR Long (Buy)
Enter at: 20.11098