12 January 2016 FX Blueprint: Forever Young Theme #5: Zar Wars: the return of Yuan solo - buy USD/ZAR The rand was one of the worst performing currencies in 2015. We remain pessimistic for 2016, as ZAR continues to face major headwinds from external factors (Fed, commodities, China) and domestic risks (lack of growth, structural problems, political uncertainty, current account deficit). Stay long USD/ZAR. r,ie'...s We expect the broad dollar uptrend to remain intact this year as the focus turns to the timing of the next hike and the possibility of faster- than-expected Fed normalization. This is bad news for the rand, which has one of the highest betas in EM to dollar strength. Moreover, broad dollar strength, along with dwindling demand and persistent oversupply issues, will continue to drive commodities weakness in the coming year. According to our Commodities research team, the outlook for metals is particularly pessimistic, and we have some way to go before calling a bottom to the cycle. This again is bad news for the rand, given South Africa's reliance on both precious and industrial metals exports. IZAR is among the most exposed in EM: high beta to !broad dollar strength and to commodities weakness 0.5 MOST &Mud 04 • IllILSN \ 03 02 01 0 •SG0 MxN • TRY • • art • ICRWIT MYR . ••es 1 -0.1 OR -01 43 -0/ 4.1 Betas to commode.. BAD crosses) Sotere-OrretrOm an newassettos 0 China is arguably the most critical external risk factor for 2016. First, potentially weaker growth in China, and growth rebalanced towards consumption rather than commodity-intensive investment, will have a particularly bearish impact on the price of metals (China is the major global consumer). Iron ore is of particular concern - China consumes nearly 60% of the world's iron ore, which is a major South African export. Second, South Africa's direct trade links with China are substantial. Third, ZAR is the most vulnerable currency