USD/ZAR: Rand weakness amid challenging conditions for emerging markets – MUFG

October has been a volatile month for the rand. USD/ZAR fell in the first half of October hitting an intra-day low of 14.354 before quickly reversing the move lower in the final weeks of the month. As economists at MUFG bank note, a less favourable external backdrop is dampening capital flows into emerging markets, which should hurt the ZAR.

Increasing speculation that the SARB will start raising rates on 18th November

“South Africa has been running an unusual current account surplus since the pandemic began which is helping to ease their reliance on external financing and make the rand less sensitive to fluctuations in global investor risk sentiment. Still the rand has been undermined by the Fed’s more hawkish plans for a faster tightening of monetary policy.”

“We expect the Fed to begin tapering QE from mid-November, and the tapering process is likely to be brought to an end by around the middle of next year. It leaves open the door for the first rate hike in 2H 2022.” 

“Global inflation concerns and the weaker rand are increasing speculation that the SARB will start raising rates as soon as their next meeting on 18th November. However, we do not expect modest rate hikes to offer much support for the rand.”

“We expect further rand weakness in the year ahead as market conditions will be challenging for EM FX.”