Last week the ZAR performed impressively in the face of a stronger USD, US rate hikes and fragility in emerging markets.
Looking at the confluence of factors this morning, not a whole lot has changed. The good news is that some emerging market currencies are recovering, which comes at a time when the USD is appreciating, and domestic technical indicators are hinting at a correction.
One positive development that should remove the risk of contagion for the Rand is the levelling down of emerging market currency volatility. It is a well-known fact that the ZAR enjoys a sophisticated market, with good liquidity, located in a convenient time zone which renders it a good hedging tool.
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Therefore, it is encouraging that the Turkish Lira and the Argentinian Peso are no longer being punished in the manner that they have been in recent weeks. This removes a major source of ZAR selling that has characterised the market in recent months and will lend the ZAR some resilience and stability throughout the remaining months of the year.
Looking into the rest of week, there is nothing new in the way of data that might upset ZAR sentiment or prove a catalyst for a broader emerging market correction. Technical analysis reveals that the ZAR is ripe for a correction and whilst that might just be temporary, it might prove disconcerting to many.
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A technical correction does not, however, change any of the fundamental analysis above and exports should take advantage of any bout of weakness back above the USD – ZAR 14.50 mark should it materialise. Through the months ahead, the core expectation remains that the ZAR will make a recovery comfortably back below the 14.00 handle and could even look to test 13.0000 if emerging market sentiment improves considerably.
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