ZAR/USD breaks 18 following Moody’s COVID-19 downgrade to Junk

In hindsight, it would have been better if Moody’s had downgraded South Africa’s credit rating during any one of their previous reviews over the past few years. As it is, the inevitable drop to junk status came in the midst of the biggest social and economic crisis the world has seen in many, many decades. As a result, we touched a new all-time low of 18.08 against the USD overnight.

The key question has been to what extent, when the downgrade did eventually arrive, would it have been priced into the ZAR. We were on the side of those who suggested that it largely would have been factored in (markets are forward looking after all). What this means is that prior to the pandemic gaining momentum, we believed that a short-term spike to 17.00 would be possible, followed by a gradual recovery back to the 15.00 – 16.00 range.

Given how the world has changed over the past couple of months, all expectations needed to be reset, not least of all South Africa’s ability to make an economic recovery, whilst fighting fires on so many fronts: stagnant economic growth, faltering infrastructure, troubled SOE’s, massive levels of debt and unsustainable levels of unemployment. These challenges have unfortunately become so well-known, yet so (seemingly) insurmountable, that it becomes all too easy to just mark them off as some kind of to-do-list. How these issues are addressed under the specter of COVID-19 becomes an almost unfathomable question? Help from the World Bank and/or IMF seems an unfortunate necessity.

Again, we’re not the only ones thinking about this and so it’s a given that much of the above is reflected in the levels at which the ZAR is currently trading. However, we now have to firmly believe that the chance of a recovery back to levels pre-Corona is now very slim indeed. We expect that we should settle around 18.00 to the USD in the near-term, where-after it will again be a case of strengthening/weakening in accordance with general risk appetite and global developments. While the extent of potential further weakness is hard to call, we unfortunately have greater conviction that even with a hard, slow turnaround, this is the new reality and a ZAR recovery below 16.00 seems a long, long way off.

Clients therefore need to resist looking back at previous targets and rates to which we’ve all become accustomed, and rather make their forex decisions with fresh eyes, whilst keeping in mind what they wish to achieve.

Stay healthy!