Rand Report – What will the South African Reserve Bank Do?

The rand’s sharp weakening over the last three months, largely in sympathy with emerging market currencies, has provided some inflationary concerns.

Emerging Markets Hiking Interest Rates

In the wake of recent monetary policy tightening from emerging markets Turkey, Argentina and Russia, there has been some speculation that the South African Reserve Bank (SARB), may follow suit and hike interest rates, at the conclusion of the Monetary Policy Committee (MPC) meeting, on Thursday 20 September. The short term recovery in the rand has perhaps provided some further speculation of this outcome. A Bloomberg poll of analysts does however continue to forecast that lending rates in South Africa will remain unchanged at the meeting, although there does remain an outside chance of a 0.25% rate hike.

Inflation

The rand’s sharp weakening over the last three months, largely in sympathy with emerging market currencies, has provided some inflationary concerns, as has the rise in crude oil prices. However, Consumer Price Index (CPI) data in South Africa has seen inflation moving from 4.6% (year on year) in June to 5.1% in July, before falling back to 4.9% in August, well within the Reserve Bank’s 3% to 6% targeted range. Core inflation has remained comfortably within the targeted range coming in at just over 4%.

Growth

While the Reserve Bank’s mandate is towards targeting inflation, the SARB will also be conscious of economic growth within the country when making its decision. First and second quarter Gross Domestic Product (GDP) data this year has confirmed that South Africa is now in a recessionary environment. Tighter monetary policy could provide further headwinds to economic growth, although an incremental rate hike would likely have little to no effect.

The Rand – Technical View (Daily Chart)

Since retesting the high at R15.65/$ the USD/ZAR has pulled back well below the R15/$ mark. A break (close) below R14.55/$ could suggest further short term declines to come with R14/$ the support target (perhaps a surprise rate hike could catalyse a move of this sort?). The long term trend for the currency pair does however remain up.

In the event of a short term decline, trend followers might consider the R14/$ mark an entry point for buying the USD/ZAR currency pair.

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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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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