Projections for the USDZAR Currency Pair
The USD/ZAR currency pair has been hovering around the 14:1 mark for several months. In 2019, The ZAR was strongest against the greenback in January when it was trading around 13.24. Since then, a gradual process of depreciation has ensued, with significant volatility for the year-to-date. The technical indicators reveal an overall sell rating for the pair, given the weak fundamentals of the South African rand.
The South African Rand has generally fared poorly since 2011, when it was trading relatively strong at 8:1 against the greenback. Analysts anticipate the South African Rand will depreciate slightly towards the end of the current quarter, moving towards 14.26 to the dollar. Various Trading Economics models project a rate of 14.84 within 12 months. The fundamental weakness of the South African rand is a product of uncertainty, poor economic performance, and endemic corruption throughout the economy.
Source: Trading Economics USDZAR Forecast
This cross pair (USDZAR) is up 3.67% for the year to date, compared to -0.01% for the EURZAR for the year-to-date. Other pairs with the ZAR are equally bearish in 2019, including the AUDZAR, and GBPZAR. Weighing on the performance of the South African rand is the current trade surplus which was measured at R1.74 billion in May 2019, less than the market expectations of a R2.7 billion surplus. While exports increased 8.1% month on month in May, imports increased at a slower pace of just 3.0%. This bearish mood is reflected among traders too. Currently, trading activity at leading brokerages like easyMarkets indicates a net short position on the ZAR, as sluggish sentiment persists.
South Africa’s current GDP rate was measured at -3.2%, and the annual growth rate was last recorded at zero. With an unemployment rate of 27.6%, and an inflation rate of 4.5%, it is clear that the South African Rand is feeling the pressure in international markets. The current interest rate is 6.75% (May 2019), significantly higher than the interest rates in developed economies like the US (2.5%), Germany (0%), and the United Kingdom (0.75%). Higher interest rates are typically associated with rising rates of inflation. In South Africa, the rate of price increases is substantially higher than any of its trade partners in the West.
The Country’s Power Problems Continue
South Africa’s electricity supplier – Eskom – is a failing enterprise which supplies 90% + of the country’s power. Nationwide power outages are standard in South Africa. The failing electricity infrastructure has crippled corporate enterprise across the nation, destroying profitability, productivity, and investor confidence.
Despite assurances from the South African president, Cyril Ramaphosa about pledging $16 billion to the ailing Eskom, the company is so deeply in debt, and desperately in need of a major overhaul that these measures will not be enough. The South African government is desperate to rescue Eskom from financial ruin. Various support initiatives are currently being mulled, including subsidies, debt write-offs, and perhaps a switch to SA government bonds.
South Africa’s credit rating has also hurt the currency tremendously over the years. Between 2017 and 2018, the major credit rating agencies, including Moody’s, S&P, and Fitch have given mixed reviews of South Africa’s economy. The latest Moody’s rating is Baa3, and a stable outlook (March 23, 2018), with S&P issuing a BB rating with a stable outlook (November 24, 2017), and Fitch giving a BB + stable rating (April 7, 2017). Credit ratings are especially important when it comes to foreign direct investment (FDI), particularly sovereign wealth funds, large-scale investors, and pension funds.
How will the US trade deal with China impact the ZAR?
The South African rand, like other emerging market currencies is heavily influenced by international markets. The US/China trade spat is a case in point. Recently, US president Donald Trump and Chinese president Xi Jinping expressed a degree of optimism about relieving pressure vis-a-vis bilateral trade sanctions. While concerns have eased somewhat, optimism is fading fast. There is now a sense of concern about tariffs being imposed on $4 billion worth of European goods as a result of the EU’s subsidies to Airbus which negatively affect Boeing.
As a result of this growing concern, demand for gold has increased. This safe-haven investment typically appreciates when uncertainty in the financial markets grows. The spot price of gold is $1418.23 per ounce, nearing its highest levels for the year-to-date. South Africa was once a dominant producer of gold, but now the country ranks at 8 (Thomson Reuters: US Global Investors) with approximately 120 metric tons of gold produced in 2018.