The story of the USD-ZAR at the moment is best explained by the performance of the USD which came under pressure on news that US non-defence capital goods orders fell for a third consecutive month, raising questions about the room the Fed has to lift rates. Given the magnitude of the losses sustained during May, the ZAR should have clawed back some of that under performance and been trading comfortably closer to the 15.0000 handle or below. That the market refuses to take the bait reflects a great degree of scepticism about SA. Yesterday, Fitch urged the SA government not to succumb to populous political practice and adopt short term quick fix policies in order to secure votes at the upcoming elections. It is yet another indication that SA is firmly in the spotlight with foreign investors.
Then there is the issue of the land expropriation bill that was passed through the National Assembly yesterday. Whilst it should be viewed as a means to expedite the land reform process in a way which fairly compensates existing land owners, one is uncertain of how it will be perceived by the offshore community. All that said, the ZAR has ground a little stronger and is now threatening key support around 15.4950. Even though EM equity valuations appear stretched, any further short term equity market gains could encourage greater interest in EM currencies including ZAR.
It is however important to note that the retreat is likely to be a relatively tentative one.