USD/ZAR: RAND’S SHARP REBOUND IN JUNE IS NOT SUSTAINABLE – MUFG

The Rand staged a sharp rebound in June. Economists at MUFG Bank analyze ZAR outlook.

Rand to remain weak

There was no clear fundamental trigger for the Rand rebound in June but the price action most likely reflects that weakness had overshot what was justified by fundamentals in May. 

USD/ZAR was more than 2 standard deviations above our short-term valuation model estimate when it peaked at just below the 20.00 level in May. While Rand undervaluation has become less extreme, the ZAR continues to trade at weaker levels reflecting the less supportive external backdrop. 

There has been a clear loss of confidence in the actions undertaken by domestic policymakers that are weighing heavily on the Rand and South African assets. Recent worrying developments include i) the decision by the Financial Action Task Force (FATF) to add South Africa to their gray list for increased monitoring given shortcomings in tackling illicit financial flows, ii) the worsening energy supply blackouts that are further dampening the outlook for growth, and iii) the supply of arms to Russia. We expect the Rand to remain weak.