ZAR: Market Scratching Head Over ZAR funding, as Curve Hits New Low

No let-up in the softness of the front-end of the ZAR swaps curve, meaning funding is falling again: one-week rates have dropped to new lows of 6.1 points, while overnight rates have dropped to 5.2 points, the lowest in over two years.

• There remains no clear fundamental driver for the soft demand here, although market speculation around coupon payments from local bonds, one-way market positioning and cash market mismatches are doing the rounds - but as is often the case in this corner of the market there's very little indication on the sustainability of such a pull lower in funding.
• The market mechanics here are very different to the other liquidity episode in EM FX we had this year in Hong Kong - in which HKMA intervention and a more isolated market exerted a greater influence - which adds to the uncertainty over what could be the catalyst for a recovery in short-end rates for ZAR.
• Sell-side reiterated their preference for ZAR (and HUF) longs in August on a carry basis. Goldman Sachs wrote just a few weeks ago that ZAR is among their preferred carry longs, and is among the most undervalued relative to peers, and set to benefit from forecasted CNY strength.