USD/ZAR: Global slowdown increasing downside risks for the rand – MUFG

The rand has fallen towards year-to-date lows against the US dollar. In the view of economists at MUFG Bank, ZAR is vulnerable to further weakness in the coming months amid unfavourable external backdrop.

Negative external backdrop offset support from domestic developments

“Elevated energy and food prices are triggering demand destruction which is now starting to weigh down more on prices. At the same time, the rand has been undermined by ongoing hawkish repricing of Fed rate hike expectations.”

The Fed has delivered a much stronger policy signal that it will raise rates further into restrictive territory in order to dampen upside inflation risks even if it results in a more notable slowdown for the US economy. It is creating an unfavourable external backdrop for the rand which leaves it vulnerable to further weakness in the coming months.”

“The negative external backdrop has more than offset support for the rand from domestic developments. South Africa’s economy expanded more strongly at the start of this year by 1.9% in Q1 although worsening power shortages are currently increasing downside risks to growth. Inflation has also surprised to the upside jumping above the top of the SARB’s target band between 3.0% and 6.0% to 6.5% in May.”