ZAR Prepares South Africa for Inflation

The South African Rand got a break this morning on the back of a weaker USD as money markets revised Fed rate hike expectations; it lowered from 100bps. The coming week is important for South Arica as it holds two important pieces of information; inflation and the SARB’s interest rate announcement. In the month of May, Inflation in South Africa exceeded the reserve bank’s upper target limit of 6% and is expected to rise to 7.2%.   if the inflation data misses market expectations, SARB cannot be influenced to reduce this 50bps projection alongside an aggressive Federal Reserve. Since the 16.00 upside breakout in late June, inflationary pressures and threats have affected hurt South African consumers. Although hiking rates is not ideal and may not be the solution, controlling a weakening rand is essential in limiting increased inflation that will further affect consumers.

The recent bleak commodity outlook awaits the decision of China’s Loan Prime Rate (LPR) tomorrow, with the 1-year expected to stay at 3.7%. In comparison, the 5-year rate, which was suddenly cut in May to 4.45% from 4.6%, may be cut once again to stimulate the property sector as mortgage repayments come under threat. Combining the SARB rate hike expectation with a potential cut by the PBOC might strengthen ZAR against the greenback this week. Also, offloading has lessened locally, giving businesses a breather from the Stage 6 blackouts earlier this month.

Daily USD/ZAR price action has the market testing the 17.0000 psychological support zone with a confirmation close below, possibly leading to further downside for the pair.