South Africa's FX pass through remains limited

South African Rand would reflect a great risk premium in order to trade off the imbalances. A weak ZAR will signal South Africa's slow economic recovery and challenges in current account deficit.

"The country's policy mix remains currency negative; we expect monetary policy to normalize gradually because inflationary pressures are not demand driven and FX pass-through remains limited, while fiscal stimulus remains hamstrung by disappointing revenue collection", says Barclays in a research note. 

China's current slow down cause strong head winds in terms of trade. Also, the rand remains sensitive to US Federal Reserves interest rate rise anticipations, as its bond market is largely owned by non-resident investors and yields still offer a negative premium.

Even if the country's USD debt is low, there is elevation in external funding requirements to SA's reserve levels, also Fitch might give another downgrade in rate by year end.

"Finally, while the spot rate has underperformed most EM peers this year, our FX flow data suggest that many investors have actually adopted a neutral ZAR position versus outright short for some of the other EM currencies. Moves higher in USD/ZAR are likely to remain swift and substantial", added Barclays.