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SARB hikes by 75 bps as inflation remains too high

Restoring inflation back to the 6-5% target remains central to the Bank’s objectives and ZAR has benefitted from recent dollar weakness but worsening local fundamentals may limit the near-term reprieve

Source: Bloomberg
  • Growth

The SARB forecasts Q3 GDP growth to amount to 0.4% with Q4 growth at a disappointing 0.1%, mainly due to rolling power cuts. The picture gets marginally better with 1.1%, 1.4% and 1.5% GDP growth in 2023, 2024 and 2025 respectively.

  • Inflation

Inflation breached the upper side if the 3-6% target in May this year and has proven difficult to reign in ever since. The welcomed global drop in oil prices have been offset by a weaker ZAR resulting in very little change in prices at the fuel pumps contributing to higher inflation, although, prices have risen steadily across the board. Headline inflation is expected to return to the midpoint of the target only in the 2nd quarter of 2024.

  • Electricity supply

A major factor adding to the meagre levels of GDP growth is the fluctuating state of electricity supply. Eskom has issued a warning that power cuts will persist into the holiday season and beyond with outages to continue for another six to twelve months as the countries sole electricity provider embarks on major repairs and capital investment projects that are set to reduce an already constrained supply.

Source: DailyFX

Immediate ZAR response

USD/ZAR dropped at the time of the announced rate hike but price action swiftly recovered to trade around the high of the day. With the US on holiday for Thanksgiving today and limited trade tomorrow, liquidity is likely to remain low. Therefore, extended moves appear unlikely on the lighter volume.

USD/ZAR five-minute chart

Source: TradingView

South African rand (ZAR) outlook

The ZAR is currently having its best month since January 2019 which has been largely driven by yesterday’s dovish FOMC minutes and the softer dollar. The minutes provided markets with confirmation of the changing narrative within the Fed from aggressive rate hikes to moderate future hikes becoming more suitable. The most notable

akeaway from the minutes was the quote, “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”, which resulted in the typical ‘risk on, dollar off’ adjustment that favors an uptick in emerging market currencies like the rand. The rate of change indicator (blue) reveals that November is proving to be the best month for the ZAR against the greenback since January 2021.

The rand is down around 6% to the high-flying USD year to date, meaning the possibility of a longer-term reversal will certainly grab the attention of ZAR bulls from the current, elevated levels.

USD/ZAR monthly chart

Source: TradingView

The daily chart reveals the bullish fatigue that has emerged throughout October and November this year with a failure to make a higher high while also exhibiting a number of extended higher wicks – hinting at a rejection of higher prices.

The bearish move broke below the ascending pitchfork and now tests the psychological 17.00 level and the prior July high. The next level of support appears at 16.70 with the next major zone of support coming in at 16.20. However, lower Thanksgiving volume is likely to result in a moderate move until US traders return on Monday.

USD/ZAR daily chart

Source: TradingView

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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