USD/ZAR: Charts and Fundamentals Point to the Upside - BBH

USD/ZAR: Charts and Fundamentals Point to the Upside - BBH

16 May 2016, 17:34
Roberto Jacobs
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USD/ZAR: Charts and Fundamentals Point to the Upside - BBH

According to analysts from Brown Brother Harriman, weak fundamentals and rising political risks, should continue to limit the South African rand (ZAR) during 2016.

Key Quotes:

“After a period of relative calm following the appointment of three Finance Ministers over the course of one week in January, political risk is rising again.”

“The economy remains sluggish (…) Power shortages and drought continue to hamper the economy, as does both fiscal and monetary tightening. As such, we see downside risks to the growth outlook.”

“Fiscal policy is a key concern given the turmoil involving the Finance Ministry.”

“Downgrade concerns remain high (…) Our own rating model has South Africa at BB/Ba2/BB, and so we believe it will lose investment grade rating from at least one agency this year.”

“So far this year, ZAR is down -1% YTD, behind only ARS (-8.5%), MXN (-5%), and TRY (-2%). This underperformance should continue, as our EM FX model shows the South African rand as having very weak fundamentals.”

Charts point to further near-term weakness. Leaving out the January 11 flash crash to near 17.92 for now, a break of the 15.89 level would set up a test of the subsequent January 18 high for USD/ZAR near 17. After that is the all-time high near 17.92.”

“With inflation likely to rise and the SARB continuing its tightening cycle, we think South Africa bonds will start underperforming more.”


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