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The "weak China trade" is in the rand; we watch the USD
With the USDZAR at 19,00, the “weak China trade” is priced into the rand, in our view. The rand, being a commodity and emerging market (EM) currency, tracks South Africa’s commodity terms of trade closely. Focusing on the post-pandemic period, the relationship of the terms of trade with the rand suggests the currency should trade stronger rather than the 19,00 level. Where weak commodity prices have led to a weak rand, we believe the larger risk right now lies in a stronger USD in the short term.
We are still buyers of the rand on an approach of 20,00 against the USD
Our “extreme peaks” model puts the fair value for the USDZAR within the R16,50–17,00 range, only marginally higher than our previous range of R16,20-16,70. More important, if the rand moves back to the 20,00 level (like in early June), we would be better buyers than sellers of the rand again (see our note The wrong time to extrapolate weakness dated 29 May). History would suggest that with the rand around R20,00, it would be the wrong time to extrapolate weakness.
Inflation in July is aided by high base effects; we expect 5,0% yoy
In July 2023, we expected headline CPI to ease to 5,0% yoy from 5,4% in June, while core CPI is also expected to fall to 4,9% yoy from 5,0% in June. We have revised our inflation forecast marginally lower for 2023. Our 2023 annual average CPI forecast is now at 6,0% from 6,3% previously, while our 2024 and 2025 forecast remains unchanged at 4,9%. Risks to this outlook remain to the upside.
A fair value summary - nominal bonds, inflation-linked bonds (ILBs) and asset swaps (ASW)
Going forward, we will publish our fixed-income fair-value sheet more frequently. Our fair-value model is internally consistent across key input assumptions, such as monetary and fiscal policy, and fixed-income assets. As highlighted in our note Upside for bonds have compressed dated 7 August, currently
- We believe cash appears attractive relative to the front and back ends of the nominal curve;
- The same goes for ILBs, although we believe the curve may steepen somewhat and shorter maturities may provide better value in an environment where an adverse inflation impulse remains likely;
In general, we would be better buyers of longer-dated ASW spreads.