SARB rate cut: where to next for the rand?

The close of the Monetary Policy Committee (MPC) meeting saw the South African Reserve Bank (SARB) cutting the repo rate by 25 basis points (0.25%).

Source: Bloomberg

The close of the Monetary Policy Committee (MPC) meeting saw the South African Reserve Bank (SARB) cutting the repo rate by 25 basis points (0.25%). The repo rate now moves from 6.75% to 6.5% and the prime lending rate from 10.25% to 10%.

The Reserve bank has lowered its inflation expectation, forecasting the Headline CPI figure to peak at 5.4% in the first quarter of 2020 and settle at around 4.5% in the latter part of 2021.

The Reserve Bank Governor acknowledged the weak first quarter GDP figure (-3.2%) but does expect a return to growth in Q2 2019. The SARB has revised its expectation for economic growth in 2019 to 0.6% (from 1% previously), although has left its forecasts for growth in 2020 and 2021 at 1.8% and 2% respectively.

The rand reaction

Usually a rate cut would be reason for a domestic currency to weaken, but he rand has in fact strengthened post the decision. The below chart of the USD/ZAR highlights the initial reaction to the SARB announcement.

The rate cut was an expected outcome and perhaps the commentary which accompanied the decision was a little bit less dovish than markets had priced in. The Reserve Bank governor has said that a 50-basis point rate cut had not even been considered at the MPC meeting and implied that the 25 basis points reduction would be the only easing to expect in 2019 (although future monetary policy decisions remain data dependant).

Strength against the US dollar has been more pronounced, although much of the move can be attributed to the greenback weakening as commentary from Fed members has fuelled speculation that US could cut rates by more than 25 basis points at the Federal Open Market Committee (FOMC) meeting, concluding on the 31st of July 2019.

USD/ZAR – Technical View

The USD/ZAR pair has now moved back to the R13.80/$ support level. A price close below this level would consider R13.65/$ and R13.50/$ as the next downside support targets.

R14/$ is the nearest resistance level for the USD/ZAR. Only if the USD/ZAR was to start trading above this level again would we consider a bullish bias to trading the currency pair.

EUR/USD – Technical View

The EUR/ZAR has broken below the R15.65/EUR support level. The downside breakout now see’s R15.40/EUR as the next downside target from the move. A break of this level (with a close below) would consider the R15.15/EUR level as a further downside target.

To renew a bullish bias to EUR/ZAR trades, we would instead like to see the currency pair trading above the R15.65/EUR mark for affirmation that the short-term downside has ended.

GBP/ZAR – Technical view

The GBP/ZAR looks to be consolidating just above the R17.20/GBP support level. This becomes our key level for our positioning of short-term trades on the currency pair. Above this level we maintain a bullish bias to trades with R18.10/GBP the next resistance level to consider. Below this level we maintain a bearish bias to trades with R16.50/GBP the next significant support level to consider.


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