On 20May we recommended an out-of-consensus short USDZAR trade at 15.72. We have nowhit our target with a 6.5% profit (Oil-EM FX divergence déjà vu). We argued that the decouplingbetween oil prices and EMFX (Chart 1) was similar to that seen in August 2015, and was notsustainable. Our view was that, if EM FX recoupled with higher oil prices, the ZAR wouldoutperform.

　　The reason for the decoupling on both occasions was rising US real rates, which have anegative impact on EM FX and, especially, on the high-beta currencies of countries that runlarge current account deficits and are dependent on volatile capital flows to finance this deficit.Our conclusion was that, given the flat inflation term premium in the US and the low level ofinflation breakevens, more inflation of financial assets was required to push US inflationexpectations higher. As a result, we forecast EM FX would catch up with oil.