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General USD weakness and a positive terms-of-trade shock will likely lead markets to continue to put aside rand-negative local. Consequently, economists at Credit Suisse have lowered their USD/ZAR target range to 13.40-13.80 (from 13.70-14.30).

The main upside risk is an adverse change in global market conditions

“We now lower our USD/ZAR target range again to 13.40-13.80. The longer the dollar prices for some of South Africa’s core exports hold around multi-year highs (e.g. platinum and iron ore) the more receptive markets are to price in the possibility of notable improvement in the outlook for South Africa’s dollar-GDP and the country’s fiscal balance, particularly as the government remains committed to prudent management of government spending.”  

“Monetary policy does not seem to be a major hurdle for the downtrend in USD/ZAR. In its latest communication to markets, the central bank did not sound worried about the ongoing appreciation of the rand. The fact that inflation seems to have bottomed while the terms-of-trade have improved may be the main reason why the central bank seems relatively tolerant of currency appreciation.”

“The key risk for holders of short USD/ZAR positions at this point is a rand-negative change in global market conditions, possibly involving an increase in real rates in the US; a sharp decline in metal prices, or a combination of the two. In that case, USD/ZAR would likely spike again to levels above 14.00. The latter level might then turn into a new base as it did in the middle of May. A larger move towards the high in early May of 14.54 would probably require these forces to be substantial.”