Forex Daily Market - Yesterday saw turbulent trade for the USD-ZAR

In today's market update, Yesterday saw turbulent trade for the USD-ZAR as the currency pair traded higher by the end of domestic hours but still managed to test the 13.5000/$-handle earlier in the day.

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US Change in nonfarm payrolls: May

Expected: 678k

Prior: 266k

Analysis: The previous nonfarm payrolls print showed the US added only 266k jobs in April, falling well short of the 1mn consensus expectation. This suggested the labour market was still suffering from growing pains as the economy continued its rapid reopening. Despite surging job openings, companies have reported that they were having trouble recruiting workers due to fears of catching COVID-19, childcare responsibilities, and generous unemployment benefits. It appears as though the economy has reopened faster than many workers have been able to return to work, although this will even out over time with a notable tightening of the labour market still expected in the months ahead. That being said, the labour market is still showing a significant amount of slack and has a long way to go before meeting the threshold for the Fed to consider cutting its monetary support. Nevertheless, the data hold plenty of market-moving potential as there are growing bets that discussions about monetary tapering may be necessary sooner than the Fed expects.


Yesterday saw turbulent trade for the USD-ZAR as the currency pair traded higher by the end of domestic hours but still managed to test the 13.5000/$-handle earlier in the day. The ZAR pushed to its strongest levels against the USD since February 2019 on the previous day, which may have exhausted its bullish run into the end of the week. Furthermore, the USD found broad support as private payroll data showed strong hiring in May, while US initial jobless claims for the week ending May 29 notched lower.


Despite the ZAR falling 0.65% against the USD yesterday, it was far from the worst performing EM currency on the day. Considering Wednesday’s gains, which took the unit to 28-month highs, the ZAR appeared to hold up well relative to the rest of the EM basket of currencies. Thus, market sentiment suggests there is still upside momentum behind the local currency, which remains roughly 1% in the green this week. Implied volatilities on USDZAR options also indicate lower near-term risk, with at-the-money volatility for the three-month tenor falling on the session yesterday to 13.62%, the lowest since February 2020.


While some robust data helped the dollar yesterday, the overall bias for the greenback remains to the downside until the Fed begins more open discussions around tapering its asset purchases. Thus, for as long as developed world monetary policy remains loose, we continue to see emerging market currencies remaining supported.


SAGBs have continued to find support this week amid a continued appreciation of the ZAR. The move has played out as offshore factors and ZAR appreciation draw down domestic fiscal funding concerns, with curve flattening taking place. While perhaps suggesting that sentiment in the economy is generally improving, curve flattening is also reflective of a fundamentally disinflationary dynamic that is being priced into the market as growth and investment pressures remain weak.


There has also been evidence of government efforts towards rooting out corruption. However, while encouraging, South Africa still needs to deliver sweeping reforms at key points of government policy, such as the privatisation of mismanaged state owned entities and reform of labour market policies that reduce the difficulty of doing business in SA. In this respect, note that this week, the SARB released a paper entitled “Addressing low labour utilisation in South Africa,” highlighting key reforms. These included delinking firing cost to tenure and opening up business regulations to allow the easier assimilation of foreign workers (and their skills) into an organisation.


The SARB working paper also highlighted that a critical government reform should focus on helping skilled workers find jobs in the economy. We contrast this with the engagement of massive hiring schemes that were seen in reaction to the 2008/2009 global financial crises, which have primarily expanded the government workforce and total wage bill despite questionable contributions to economic growth. The bank has released several papers in the last few months addressing the need for structural reforms in SA. It will be interesting to see whether these academic endeavours find their way into the government debate.

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