Long USD/ZAR: Aggressive Fed Marking the End of the Road for Resilient Rand?
After a strong Q1 in 2022 for the ZAR (which has been the trend over the past few years), the rand could be in for a turnaround. Before delving into potential Q2 influences it is important to remind ourselves of the rand’s recent support:
-War in Ukraine driving supply concerns.
-Higher commodity prices (in particular rand-linked exports such as iron ore, gold[1], platinum and coal).
-China’s relative resistance to geopolitical tensions in Europe – primary trading partner with South Africa.
-Subdued Fed.
These four major factors will remain key influences going into Q2 with some likely changes which may skew forecasts in favour of the dollar. The first and most important in my opinion is the Fed’s pivot to a more hawkish stance. Fed Chair Jerome Powell has opened up the possibility for 50bps hikes going forward while money markets are currently pricing in roughly 250bps of Fed tightening for 2022!
Whether the US economy can handle tightening of this severity is another question altogether but what we can deduce is that the Fed and SARB’s rate hike path will differ drastically. In addition, it can be said with certainty that the South African economy cannot cope with such drastic tightening measures.
The graphic below shows the current approach from the two central banks. With current expectations, we are likely to see the Fed funds target rate (red) steepen far quicker than the South African repo rate. In addition, USD/ZAR[2] tends to trend higher in Q2 (historically speaking) and this may well unfold in Q2 2022.
USD/ZAR Vs. U.S. & South African Interest Rates (2012 – present)
Chart prepared by Warren Venketas, Refinitiv
China’s bearing on the rand
