ZAR likely to continue depreciating against USD in coming months

South Africa continues to be quite vulnerable for an increase of external financing costs, which would happen when the US Fed raises interest rates. Even if the country’s current account deficit has narrowed to 5 percent of the GDP from 6.8 percent of GDP, it is predominantly because of decline in imports. This might be a first sign of financing issues, said Commerzbank in a research report. The extremely high volatility in the USD/ZAR pair signifies that foreign investors are not quite attracted towards South Africa.

A decelerating economy, relatively unattractive real interest rates and imbalances in the external balance, along with the probability of rating downgrades form a challenging environment for the South African rand. The periods of rebound, when the ZAR is able to gain from an increase in risk appetite are not expected to be sustainable.

“We therefore see the risk that ZAR will continue to depreciate against USD over the coming months, and to a lesser extent also against EUR. We expect USD/ZAR rates of 15.20 at the end of 2016. The depreciation pressure is only going to ease off slightly in 2017”, added Commerzbank.