USD / ZAR ANALYSIS
- MPC decides to increase the rate from 25bps to 3.75%.
- USD / ZAR hits annual highs following TRY collapse, rejecting SARB announcement.
RAND’S FUNDAMENTAL CONTEXT
THE SARB DECIDES TO INCREASE THE RATES
The South African Monetary Policy Committee (MPC) was split in its decision to hike rates with a 3-2 split in favor of a rate hike. Ahead of the announcement, Governor Lesetja Kganayago described many factors that could easily lead to a more accommodating approach. Below is a summary of these points:
- Incremental increases (25 bps) are expected QoQ through 2022 – 2024 but dependent on the data.
- Core inflation remains subdued.
- Power cuts to curb economic growth.
- 2021 Local growth revised downwards.
- A certain advantage over a more rapid deployment of the vaccine at risk.
- Export prices of commodities linked to South Africa are expected to decline.
- High oil price forecasts emphasized.
- The escalation of wage demands.
Source: DailyFX Economic Calendar
USD / ZAR PRE-ANNOUNCEMENT REINFORCEMENT
Prior to the SARB announcement, the rand depreciated compared to the US dollar as a more hawkish Federal Reserve (Fed) promotes further hikes. Today the Dollar Index (DXY) is trading lower, but the USD / ZAR is about 0.4% higher despite the markets expecting interest rates to rise.
The dynamic behind the rate announcement is complex as the SARB faces several opposing factors.
- Inflation – Despite endemic inflationary pressures globally, South Africa’s figures remain relatively low while remaining within the inflation target range of 3% to 6%. While this is on the high end, it doesn’t lead me to believe that a rate hike is meant to fight inflation. From a historical point of view, inflation is relatively low, as shown in the graph below:
South African inflation rate (yellow) vs unemployment rate (blue):
- Unemployment – A recent Bloomberg announcement in August 2021 revealed that South Africa’s unemployment is at the top of their list (82 countries in total). Too rapid a rate hike will further exacerbate an already bad situation and should be carefully considered by policymakers for its long-term effects.
- Currency depreciation – With central banks around the world becoming increasingly hawkish, an already vulnerable rand is likely to weaken further if no rate hike action takes place. This is especially true for G10 countries which are more inclined to present their prospects for tightening and reducing the trade appeal of ZAR.
- Economic growth – The pressure of COVID-19 on commodity-rich countries like South Africa has created a facade with the recent surge in commodity prices which has acted as a buffer against other economic challenges. These Headwinds Eskom is currently struggling to tackle power supply headwinds, leaving South African businesses in tatters as disruptions create gaps in business processes. While a small rate hike may seem insignificant, the ripple effects are certainly felt in such an environment. Access to low-interest financing can be a barrier to further economic expansion.
USD / ZAR DAILY CHART
Graphic prepared by Warren Venketas, IG
Contact and follow Warren on Twitter: @WVenketas