Based on our rand model, narrower EM growth differentials, reduced support from commodity prices, and flight to dollar quality, have turned the prospects towards a weaker rand exchange rate over the next few months compared to our previous view. These fundamentals are consistent with the rand trading at 7.50/USD by Q4, implying near-term strength from existing levels, and weakening to 8/USD by end 2012. This compares to our previous forecasts of 6.90 and 7.70 end-2011 and 2012, respectively.

DB positioning indicators are showing that investors are still fairly neutral with no clear selling bias, or net short rand positions. While recent selling activity had been largely from leveraged accounts, there is clearly significant weakening potential ahead once real money funds start capitulating. The rand thus remains vulnerable to further deterioration in global risk sentiment.

Compared to a basket of EM and commodity-based currencies, the rand's weakness may have been overdone, but this is not unusual for the rand. Importantly, the link between commodity prices and G7 industrial production has recently strengthened, and any further deterioration in G7 growth therefore implies that there may be more downside in commodity prices. As such, sustained pressure on the exchange rate cannot be ruled out.

The overall picture of retreating commodity prices, much weaker growth in G7 economies and rising input costs suggests that export performance may not be bolstered as some may hope. G7 growth remains a far important driver of the trade balance. We have thus revised our CAD forecast to -3.7% of GDP for 2012 from -3.3% previously.

On inflation, the direct impact of these revisions is marginal, with inflation expected to settle at 5.8% in 2012, though the short-term profile has been raised by 0.2ppts as a result of rand adjustments. In light of the SARB's preference for a market-determined exchange rate, we do not expect any undue intervention.

Eoin Treacy's view Despite persistent fears about standards of governance in South Africa, the Rand has until recently been among the steadier currencies internationally. However, the US Dollar has been particularly strong of late and the Rand was not spared from concerted selling pressure.

Some of the Dollar's short-term overbought condition has been unwound over the last few days. The ZAR7.5 area marks the upper boundary of the yearlong base and a sustained move below it would be required to check medium-term scope for additional US Dollar strength.

The Euro has posted a more consistent pattern of appreciation against the Rand since early this year. It posted a failed downside break in January, broke above ZAR10 in August, retested that level two weeks ago and broke upwards again last week. A sustained move below ZAR10.5 would be required to question the consistency of the medium-term advance.