South African Rand Dollar Outlook: USD/ZAR Recovers from Recent Slump

During the last few weeks, the South African rand has regained some of its ground lost from its recent slump. However, there are still risks that the rand may see further weakness in the weeks ahead. The rand is still volatile, and will continue to be affected by a number of international and domestic factors. There are also some risks associated with the US monetary policy decision taking place this week. If the Fed raises interest rates in an aggressive manner, it could lead to increased volatility in the rand.

Inflation is also a key factor that weighs on the rand. The SA CPI has cooled to 4.9% y/y in June, which is a sharp drop from 5.2% y/y in May. The rand is also affected by supply-side pressures that are driven by high prices for commodities. This year, overall commodity prices have increased 7.8% y/y.

The SA budget is not expected to offer a fiscal consolidation back to pre-pandemic levels. It is also expected to show little change from last year’s budget. This may disappoint investors who have been hoping for a more pronounced fiscal consolidation approach in the Budget. This will undermine the rand. There are also risks associated with the ongoing Russian/Ukraine conflict.

The US economy is also a key driver of the rand. As the Fed continues to hike interest rates, markets have become nervous. However, the FOMC is not expected to raise rates indefinitely. Instead, the FOMC has indicated that it will likely raise interest rates in December and in February of 2023. If the Fed raises rates in December and in February, it will add to the pressure on the rand. This could also affect US jobs data. In addition, it will likely raise inflation expectations.

While the South African Budget has not been expected to offer a fiscal consolidation back to post-pandemic levels, it is still expected to provide for a reduction in the fiscus. It is also expected to show little change in its fiscal metrics, which has contributed to the strength of the rand in recent months.

The FOMC meeting takes place this week. A 50bp hike is expected. This will bring the total number of US interest rate hikes to 75bp for the current cycle. However, there is a chance that the Fed will hike at an aggressive pace, which could lead to more volatility in the US dollar.

The US Budget is also expected to show little change from last fiscal year’s budget. This would make fiscal consolidation more difficult. In addition, it could provide a greater opportunity for political coalitions. There are also fears that further signaling on the political side could upset the rand. In the meantime, there is an outside chance that the FOMC will hike the repo rate by another 100bp in September. This would bring the total interest rate hikes in the US cycle to 2.25%.

The US Budget is also expected to provide for more tax compliance. This is due to the rebuilding of SARS’s capacity, and is expected to improve gradually. The economy is expected to grow at around 2.0% y/y this year. However, little new implementation of reforms is expected to drive growth higher.