Rand Outlook Remains Soft Despite Hawkish SARB Statement

Above: SARB Governor Lesetja-Kganyago afforded the ZAR support by indicating interest rate cuts were currently not being considered by the bank. Image ©Pound Sterling Live 2015.

The South African Reserve Bank (SARB) left the repo rate unchanged at 5.75% at their January meeting.

The statement delivered by the governor was not as dovish as currency markets had anticipated; the MPC poured cold water on the idea that it might ease.

This provided an upside surprise for the South African Rand exchange rate complex (ZAR) which subsequently moved higher.

Analysts tell us today that despite the surprisingly positive tone delivered by the SARB the outlook suggests the ZAR will continue to struggle through 2015.

At the time of writing we see the British pound v South African Rand (GBP/ZAR) quoted at 17.3948. The US Dollar to Rand is at 11.5918.

The Euro to Rand is at 13.1124.

The January Statement

The MPC said their inflation forecast allows for a pause in the normalisation process.

“The SARB has not stepped clearly away from the hiking cycle, but in our view makes further hikes very much dependent on external factors (Fed hikes and rand weakness). It seems easing is still on the cards if intensifying global disinflation overwhelms the SARB,” says Mamello Matikinca at RMB in Johannesburg.

According to Mike Keenan at Barclays:

“Our clear conclusion is that rates are clearly on hold for a while. We continue to pencil in a 25bp rate hike for September, but feel the risks are strongly tilted in the direction of a later move, if the Fed’s rate hike is delayed past mid-year or if the market reaction to the Fed rate hike is benign.”

RMB tell us the statement was very likely a first step in gradually changing tack on the policy outlook and expectations management.

The Bank’s inflation projections have improved significantly since the last meeting; inflation is now expected to average 3.8% in 2015, down from previously 5.3%, and to 5.4% from 5.5% in 2014 — the low base for 2015 results in elevated inflation in 2016.

The Impact on Rand Exchange Rates

From an exchange rate perspective, the SARB mentioned that the ZAR remained vulnerable to the SA current account deficit and the onset of Fed tightening, but was quick to highlight that the trade-weighted ZAR remained stable as the gains made against the EUR largely offset the losses in relation to the USD.

“That the ZAR strengthened while bond bulls, particularity at the belly of the curve, locked in profits immediately in the wake of today’s decision suggests that the market was expecting a more dovish policy statement,” says Keenan.

RMB currency analyst John Cairns tells us that while the hawkish SARB statement has helped the rand in the short term the bias is still for losses.

ZAR will likely remain under pressure alongside the broader commodity currency complex of which it is classed.

We saw the Canadian central bank cut rates in January which pressured the CAD lower while the Reserve Bank of New Zealand indicated that they are likely to keep a soft-touch approach to raising interest rates.

Commenting on recent price action, Cairns says:

“USD/ZAR came close to running away yesterday, getting to 11.67 on strong importer orders and the weakness in the rand’s compatriot currencies, notably the Turkish lira.

“The reversal started before the SARB announcement but, nevertheless, the rand weakness yesterday shows that the bias is upwards and the market is a little on edge.

“The hawkish tone of the MPC statement did little for the fixed income market but did wonders for the rand. As we said yesterday, currency markets are extremely sensitive to changes in interest rate outlooks. This sensitivity will not last but, for now, the more hawkish tone of the SARB compared to other central banks is a real positive to the local unit.

“The rand will get further help today if the trade number improves meaningfully, as we expect it to (albeit for seasonal reasons – see below). The US economy is anticipated to have grown by 3.0% q/q in 4Q14. Eurozone inflation is expected at -0.5%.”