South African Rand: The Three Near-Term Threats for ZAR

The South African Rand (ZAR) maintains a solid footing as we move into a key mid-week session. 

The agenda for ZAR is a busy one for the week starting 17th of the 11th. We consider the three key events that will determine the outlook for the South African currency in the near-term.

First, the spot currency market rates show some solid support for the Rand:

• The euro to South African Rand exchange rate (EUR/ZAR) is 0.00 pct lower on a day-to-day basis at 13.8396.
• The US dollar to South African Rand exchange rate (USD/ZAR) is 0.02 pct lower at 11.0419.
• The British pound to South African Rand exchange rate (GBP/ZAR) is 0.10 pct lower at 17.2425.

"USD/ZAR is back at 11.07, well within the existing range that extends from 10.85 to 11.39, but at risk of large swings in what could be a volatile week. EUR/ZAR is at 13.90, remaining far more stable than USD/ZAR, which continues to be thrown around by EUR/USD," notes analyst John Cairns at RMB in Johannesburg.

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The Three Risks to ZAR This Week

Event risk this week comes from three fronts.

• First, the Fed minutes late on Wednesday night.
• Second, the local MPC policy decision on Thursday.
• Third, sentiment data — including ZEW, PMI and economic sentiment indicators — from the Eurozone which will be released through the week.

"The ideal for the rand would be a dovish Fed, a SARB that hikes and decent Eurozone data," says Cairns.

From a technical perspective, "USD/ZAR’s reversal out of the 11.30s has put in back near the middle of the existing range. The floor we see at 10.85, the three-year trend line that has held since 2011. Resistance is in a band that stretches from 11.35 to 11.39," says the RMB analyst.

South Africa's Economic Points to Watch Out For

The week ahead will be a very important one on the macroeconomic data front.

The SARB will start its three-day monetary policy meeting on Tuesday. Before it announces its rate decision on Thursday, Stats SA will publish the October CPI survey on Wednesday.

RMB economists expect headline CPI inflation to have stabilised at 5.9% and core inflation by 5.6%.

Prices should have risen by 0.2% during the month, driven higher by food and beverage prices; however, petrol price cuts should have limited the rise.

Analysts say the inflation profile is expected to improve further in the months ahead mainly due to the weaker oil price. The decline in food prices should also keep the inflation rate benign.

"While the inflation profile may be improving, the weak rand exchange rate still poses upside risk. Risks of inflation expectations remain above the 3% – 6% target range. The continued rise in core inflation and the potential of higher GDP growth revisions expected next week should be enough to justify a rate hike," says Mamello Matikinca at RMB.

Also, communication by the new Governor Lesetja Kganyago has, in RMB's view, been very hawkish.

"As such, we expect the SARB to hike rates by 25bp — this is against the consensus view of no hike. We expect the hike to be accompanied by a neutral MPC statement, which should allow the SARB to keep rates on hold for some time," says Matikinca.