The COVID-19 impacted South Africa and the USDZAR exchange rate since the beginning of 2020, given the country faced similar challenges as other places where the spread of the virus prompted tight restrictions and economic lockdown.
For the time being, South Africa is struggling with the third wave of the pandemic, which marked a new record in daily cases on July 2nd. However, a focus on how the local currency has performed against the USD is necessary, to gauge the risk sentiment and potential future implications.
2020 Dollar Shortage Pushed ZAR Lower
When it comes to Forex South Africa, there had been a textbook performance in ZAR. As the pandemic-related fear hit financial markets in March 2020, the US dollar had risen against all its peers, including the Rand. USDZAR jumped from 14.05 at the beginning of 2020 to 19.3 in April, where it found a temporary top.
Demand for the global reserve currency as well as a short-term liquidity crisis did not favor emerging markets, including South Africa, which struggle to finance their activity when credit markets freeze.
Persistent ZAR growth since March 2020
Massive fiscal and monetary stimulus had reversed the risk sentiment and flows started to move outside the USD, favoring the Rand by a large. The exchange rate weakened from the March 2020 highs and reached levels not seen since January 2019. From a technical perspective, USDZAR is now consolidating a little below the 200-day simple moving average, as the reopening narrative is facing a setback.
The latest FOMC meeting represented a key turning point for the US dollar, considering the largest central bank in the world started hinting at tapering. Although the data shows South Africa is also set for interest rate hikes, poor vaccination prospects and the ongoing worrying spread of the virus might postpone monetary policy normalization until 2022.
Experts and epidemiologists are warning against variants like Delta or Epsilon, which are able to spread much faster. Advanced economies had been favored by swift access to vaccines, yet the situation is completely different in emerging markets.
Interest rate hike expectations to favor emerging markets?
Financial markets switched their focus in 2021, and now inflation developments, as well as economic activity getting back to normal, will matter the most. On the inflation front, emerging economies such as South Africa are more vulnerable, given they need to finance deficits with loans in foreign currencies, like the US dollar.
That means the emerging countries might need to act faster in order to temper inflation, to avoid letting it spiral higher in an uncontrolled fashion. If the SARB will move interest rates faster than the FED, the Rand might continue to rise against the USD.
In case COVID-19 cases will remain elevated, the South African government will need to keep economic support in place and even reinstate restrictions. That is not the case for the time being, but the prospects for interest rate hikes are now questioned by the markets. It should change once uncertainty around the pandemic will ease again.