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USD/ZAR began the year sub 13.95, but the market traded above 19.35 within four months. Now, amid a surge in coronavirus cases in the African country and an increased fiscal spending, Jeremy Stretch from CIBC Capital Markets warrants caution and anticipates USD/ZAR could touch the 17.90 level. 

Key quotes

“The number of domestic Covid cases continues to advance strongly. With the peak still to be reached, the damage of local lockdowns will likely be more extreme than expected. Hence, in contrast to many other jurisdictions, growth assumptions are being revised down rather than up.”

“Against the economic backdrop the government aggressively pursued a policy to alleviate the ravages of the crisis. However, amidst a ballooning budget deficit, the government may be forced to consider adjusting fiscal expenditure. Finance Minister Mboweni has stated that spending needs to be cut in an effort to avoiding another sovereign debt crisis in the next four years. Central Bank Governor Kganyago has also noted that the country has run ‘crisis level deficits’ even before COVID started. Concern about public finances can risk an unwind of near-term ZAR longs, risking a spike back towards 17.90 prior to the gradual rebound through 2021.”

“Q3 20: 17.7 | Q4 20: 17.4”