USD/ZAR Rises as SA Reserve Bank (SARB) Pauses After 10 Consecutive Hikes

SARB Rate Decision, USD/ZAR Rate Forecast:

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The South African Reserve Bank (SARB) has opted for a pause for the hiking cycle with Governor Lysitja Kganyago responding to a question about whether rates have peaked with a resounding ‘no’. Although Deputy Governor, Coben Naidoo, stated that the Reserve Bank sees itself on a “downhill path” if you were to think about the range of inflation target by the Reserve Banks.

Food prices were once again cited as a concern despite lower inflation figures this month, something that appears to be a global trend at the moment. Forecasts for food inflation for 2023 remain elevated but were revised downward at this meeting to 10.3% (from 10.8%), and rise slightly to 5.2% in 2024 (from 5.0%).

Source: South African Reserve Bank (SARB)

The governor said recent changes in terms of load easing have revised upward GDP growth to 0.4% from 0.3% in May. The Governor was quick to point out the fact that the general environment continues to change which means we can see changes on a meeting-to-meeting basis. The Governor also focused on the issue of restrictive rates and the effects on the economy saying that monetary policy only affects cyclical growth over 6-8 quarters and is not a conducive to the faltering growth that the economy is suffering from. Looking ahead, GDP growth forecasts for 2024 and 2025 remain unchanged from the previous meeting, at 1.0% and 1.1%, respectively. According to the Governor, while economic conditions appear to have improved in South Africa, the long-term outlook reflects the uncertainty in the global environment. Commodity export prices continue to weaken which does not bode well for the mining sector in particular.

Source: South African Reserve Bank

South Africa and the Rand moved forward

Looking ahead, Governor Kganyago stated that as we enter the second half of 2023, the near-term outlook for the global economy is broadly unchanged, with inflation easing and growth expectations stable. However, the long-term economic outlook remains clouded by risks on the path of inflation, persistent geopolitical tensions and the effects of climate change. South Africans make more use of unsecured credit in order to meet basic needs which is not a sustainable situation. The recent decline in inflation is positive, however any inflation risks remain tilted to the upside for the time being.

The MPC was quick to reiterate how quickly things can change making it near impossible to get it right all of the time. Having said that, the committee expects to remain vigilant with decisions that are data-driven and sensitive to the balance of risk over forecasts.

Next week brings the next meeting of the Federal Open Market Committee with the US Federal Reserve expected to raise interest rates by 25 basis points despite positive signs on the inflation front. This could affect ZAR in the short term, but it could also be a Fed rate high which would bode well for the exchange rate moving forward in the longer medium term.

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market reaction

The initial market reaction saw USDZAR rally towards the 18.0000 level which I would expect to hold given the 200 day EMA is holding at the 18.0394 handle. Although it looks ready for a correction, any rush higher between now and next week’s FOMC meeting could be short-lived as more bearish USDZAR appears to be gaining traction as fundamentals and technical indicators start to line up.

Immediate support on the downside is around the 17.7900 handle with a break down refocusing on the 17.4000 breakout area which could prove a major stumbling block for further downside. Alternatively, if we were to break higher above the 18.0000 mark and the 200-day moving average, we could find resistance lurking around the 18.1500 handle before eyes turn to 18.5000 which sits below the 50-day moving average at 18.5400.

US dollar / South African rand Daily chart, July 20, 2023

Source: TradingView, prepared by Zain Fouda

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @employee