According to analysts at CIBC, the recent issues surrounding banks, combined with high ZAR nominal yields, have led investors to abandon their assets for the safety and liquidity of the USD. This has resulted in a capital flight, with speculative investors extending ZAR shorts to all-time extremes in the wake of a record weekly ZAR position reduction in mid-March.
With speculative investor capitulation and bond holdings unwinding, a significant improvement in risk sentiment could occur, possibly causing the near 7% year-to-date ZAR depreciation to materially snap back. This may prompt the USD/ZAR to rebound back towards the 200-Day MAV at 17.51.
Moreover, the South African central bank (SARB) has lowered its 2023 growth assumption to 0.3%. This is due to considerable load shedding and ongoing rail freight headwinds. Inflation also remains a concern for SARB, with it staying outside of the 3-6% target range since May 2022. Policy tightening now risks extending towards 8.00-8.25% from the initially assumed terminal rate of 7.75% before the unexpected 50bps hike on 30 March.
SARB’s decision to lower its growth assumption and maintain a focus on inflation, coupled with persistent capital flight, has led the analysts at CIBC to forecast the USD/ZAR pair at 17.85 by the end of the second quarter and 17.45 by the end of the third quarter.
Weaknesses in the South African economy and financial sector have led to a depreciation of the ZAR, prompting investors to seek refuge in other assets such as USD. However, should risk sentiment improve, the current depreciation could lead to a significant snap back in the USD/ZAR ratio. The continued focus on inflation and a lowered growth assumption by SARB also contribute to the uncertainty surrounding the ZAR.
As the South African economy continues to struggle with load shedding and other headwinds, it is likely that further changes will be required in order to maintain stable growth and inflation. Policy tightening and changes to interest rates may be necessary, but this may not be enough to overcome the current challenges in the region.
Looking ahead, the ongoing capital flight from the ZAR may act as both a motivator and a caution for investors. While some may see this as an opportunity to capitalize on potential rebounds in the ZAR, others may choose to remain cautious and avoid the associated risks. Furthermore, the stability of the South African economy and the continuation of its growth will undoubtedly be a significant factor in the decisions made by investors and the overall trajectory of the USD/ZAR ratio.
In summary, the current depreciation of the ZAR and its potential to snap back, coupled with ongoing concerns surrounding the South African economy and financial sector, have led analysts at CIBC to forecast the USD/ZAR pair at 17.85 by the end of the second quarter and 17.45 by the end of the third quarter. Investors may choose to capitalize on the potential rebounds in the ZAR or opt to remain cautious due to the associated risks. Regardless of the decision, the South African economy will continue to play a major role in influencing these numbers and the overall health of the ZAR.