The rand is a key global economic indicator and a key performance indicator for the South Africa market. Recently, we released our latest USD/ZAR outlook which projected a slight strengthening of the South African currency over the coming quarters (and an anticipated recovery in commodity markets across the globe). But in light of the recent and robust global retail sales figures released late last week, one might have to revise our USD/ZAR outlook upward. While a possible strengthening in the rashes of the dollar does seem to imply a strengthening in the USD, the same cannot be said for other emerging markets. While other emerging markets like India and China are doing well, it seems that South Africa has a lot more riding on its shoulder.
Consumer sentiment has been on a steady rise in South Africa over the past year and a half. This is supported by the solid increase in the number of sales over the past twelve months, especially in the consumer staples market such as food and drink and basic home products. Stronger consumer sentiment is also expected to contribute to an improvement in the economic outlook for the quarter ahead as the boost in consumer spending will help offset the higher interest rates the Reserve Bank of South Africa (RBA) is contemplating introducing into its existing banking system.
The recent weak economic indicators in the U.S. also do not bode well for South Africa. Our USD/ZAR forecast suggests that the weak consumer sentiment in the U.S. will weigh heavily on the strength of the South African dollar. Economic indicators in South Africa are picking up, but analysts believe the recovery will be gradual. Inflation is moderate and forecast to remain so, while the trade deficit is narrowing (although this is subject to future government policies and trends). In addition, there is some downside risks to the economic indicators in South Africa since weaker economic conditions in Australia and Canada are likely to weigh on exports, which could depreciate against the USD.
There are three key economic indicators from the United States to consider when determining the impact of the U.S. dollar on the rand. These include gross domestic product (GDP); consumer price index (CPI); and the personal income factor (PIF). The first two indicators are considered to be free-market measures. Gross Domestic Product (GDP) measures the performance of the economy against other economies. The Consumer Price Index (CPI) measures the inflation of basic products such as food, drinks, and electricity. And the personal income factor measures the income level of households in their capacity to buy goods and services.
Since trading is one of the largest components of the Forex market, the USD/ZAR Outlook indicates that the USD has been strengthened against many other currencies. This is supported by the fact that over the last two years, the U.S. dollar traded relatively stronger against most of the major currencies. As a result, the USD/ZAR climbed over seven percent versus most of the currency pairs over this time frame. USD/CAD was the only currency pair that did not gain against the USD during this time frame.
This is contrary to the USD/CAD, which remained fairly consistent over this time frame. In fact, there were only a few occasions where the CAD was weaker against most of the currencies over this period. Looking at the historical data, it is difficult to attribute the strength of the USD to economic fundamentals. Most economic indicators in the United States indicate a soft economic recovery with little evidence of inflation. In addition, there is little evidence of overconfidence in the U.S. economy or the ability of the American consumer to finance its current debt burden.
In addition, the United States government and the American public have become increasingly confident in the strength of the U.S. economy. To the private sector, this should serve as a positive for their portfolios, as they should see no reason to hold back on investing in the United States. However, the continuation of economic indicators pointing to an impending economic uptrend may prevent the market from reaping the benefits of these good news. The continuation of these low interest rates and low stimulus measures should be accompanied by strong demand and supply in the economy. In other words, we do not want to see too much of the available goods and services disappear from the shelves of retail stores.
This USD/ZAR Outlook takes into account the recent weakening of the Chinese economy, the recent slowing of the Japanese economy, and the weak performance of European economies. All these factors combined will weaken the dollar and weigh on global economic indicators. As a result, a strong USD will help the United States economy, while a weaker USD will weigh down the United States economy. If you want to trade the USD/CAD, make sure to do so when these conditions are present. Get your investment strategies in place before y