Johannesburg – The South African currency rode the tailwinds of external appetite for risk assets during the early European session as dollar weakness lingered, fueled by vaccine optimism and hopes for US fiscal stimulus according to NKC Research.
The favourable external backdrop provided shelter from a brittle domestic environment, as fiscal consolidation uncertainty surrounding the public wage dispute persist and South Africa recorded a worrying increase in infections.
The solid gains for higher-yielding emerging market (EM) currencies in recent weeks do not deter us from expecting a lot more. We think EM carry trades are just getting warmed up.
After a stellar decade during the 2000s and in the initial period after the 2008 global financial crisis, EM carry has been in a decade-long struggle, with 12-month periods of negative returns far outstripping those with positive returns. We are increasingly confident that the coming 12-18 months are going to be positive for EM FX carry.
And, despite the inherent uncertainties surrounding longer-horizon views, there are tempting arguments to extend this constructive view on EM FX carry to a multi-year horizon similar to that seen during the decade-long period from 2002 till 2012. Expected range today R15.10/$ – R15.40/$.