ZAR: Rand Remains Resilient as SARB Skips Rate Hike

ZAR: Rand withstands the SARB skipping a rate hike

In a mark of how far the mood in the FX market has changed, the South African rand only dropped around 0.5% on yesterday's decision from the South African Reserve Bank (SARB) to keep the policy rate unchanged at 8.25%. The market had widely expected a 25bp rate hike. Barely a few months ago a decision like this would have caused heavier losses for one of the most volatile emerging market FX pairs in USD/ZAR. The vote was close – three to two in favour of unchanged rates – but now the market thinks that the SARB has concluded its tightening cycle and will be easing policy in the first half of next year.

The fact that the rand did not sell off more shows that investors feel calmer about inflation prospects and increasingly like high-yield EMFX ahead of a possible cyclical dollar decline later this year. The rand of course has its challenges such as weak growth, a widening current account deficit, and the geopolitical headwinds of its relationship with Russia. However, if we are right that portfolio flows to EM rebound later this year, the rand should do well given South Africa's large weighting in EM bond and equity benchmarks. 

As for most other high-yield EM currencies, we think the rand can outperform the steep USD/ZAR FX forwards curve.