South African Rand Eyes $15.23 after Reversing Late 2021 Losses

• ZAR at highest since early Nov
• Reverses post-Fed taper losses
• As USD relents on profit-taking
• SARB expectations also aid ZAR

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The Rand reached its highest level since the opening days of November this week as Dollar exchange rates gave up some of last year’s gains in what appeared to be a wave of profit-taking that has now fully reversed the losses sustained by the South African currency late in 2021.

South Africa’s Rand snatched back the ground it lost during November and December this week in a rally that gathered steam on Wednesday after remarks from Federal Reserve (Fed) Chairman Jerome Powell appeared to prompt widespread selling of the Dollar.

“Markets are gaining optimism from the increased certainty of US monetary policy, and the rand is gaining from the still very elevated domestic FRA curve, with about a 2.00% hike in interest rates factored in this year,” says Annabelle Bishop, chief economist at Investec

The Rand benefited this week as the market appeared to book profits on earlier wagers in favour of the Dollar, leading it to fall against most currencies in price action that had pulled USD/ZAR back back below 15.50 by Thursday.

Wednesday’s new high of 7% for U.S. inflation was also followed by further gains for the Rand against the Dollar, Pound and other currencies, which have left USD/ZAR on course for a return to 15.23 while pulling the Pound to Rand rate back toward 21.00.

Above: USD/ZAR shown at daily intervals with Fibonacci retracements of May 2021 rally indicating likely areas of technical support.

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“USD/ZAR dropped to a 2-month low of 15.35 as the rand capitalised on real yields, higher commodities and profit taking in the dollar. A pullback towards 15.00 from here is not ruled out,” says Kenneth Broux, a strategist at Societe Generale.

The Rand had underperformed developed and emerging market counterparts in the second half of 2021 as the Fed inched toward an underway normalisation of its monetary policy that is widely expected to continue in earnest this March with the first in a likely series of interest rate rises.

That process lifted the Dollar sharply although the rally had lost momentum already before the open of the new year and culminated, for the time at least, this week with a sell-off that has lifted the Rand back to two month highs.

“We see scope for a recovery by the end of this week, as imminent Fed tightening and room to cement views around a fourth Fed hike in 2022 (the Fed’s Bullard sees this as the base case scenario) still offer the greenback – which should now have a less skewed net-long position - some appeal on dips,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING, referring to the Dollar.

Much about the short-term outlook for the Rand depends on whether the Dollar is able to draw a fresh bid from the market following this week’s losses.

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However, some analysts say the South African currency has also likely been helped by recently hawkish market expectations for interest rates at the South African Reserve Bank (SARB), which have come to favour an increase in the cash rate being announced as soon as January 27.

“We expected a 25bp lift in the repo rate this quarter, after the 25bp hike at the last MPC meeting (November 2021), but only it in March, as it would be quite aggressive of South Africa’s Reserve Bank (SARB) to hike the repo rate at every meeting,” Investec’s Bishop said on Wednesday.

The possible rub for the Rand is that as January comes to a close the SARB could elect to eschew an interest rate rise given that inflation sits near the bottom of its target band once changes in energy prices are overlooked, and unemployment has recently reached a record high.

Any such a decision would be a disappointment for the market however, and might be likely to prompt a short-term setback for the Rand.

“We are positioned more dovishly than implied by the market. Our baseline is 100bps of tightening over the course of 2022, while the market is pricing in around +180bps,” says Izidor Flajsman, an emerging market strategist at TD Securities. “We remain cautious on rand.”

Above: GBP/ZAR shown at daily intervals with Fibonacci retracements of May 2021 rally indicating likely areas of technical support.