The SARB left the repo rate unchanged at 6.75% after the MPC meeting on Thursday. This was unexpected as the market was expecting a 25-point rate cut. The knee jerk reaction, was predictable, and the rand strengthened slightly against both the pound and the dollar.
Reserve Bank Governor, Lesetja Kganyago, highlighted the following:
The vote was tied within the MPC with three members voting for a 25-point cut, and three members voting to leave rates unchanged.
While economic growth picked up in the second quarter the medium to long term outlook remains poor and business confidence remains low.
Inflation is expected to remain in the 3%-6% target range. However, some inflation risks have become more pronounced – most notably the currency.
So, this is a case of the currency driving rates, rather than rates driving the currency.
Since the initial move, the rand has established a trading range against both pairs. On the longer-term charts, the currency is establishing an inflection point against the dollar. Meanwhile, it is looking vulnerable against the pound. The market is now split on whether rates will fall at the final MPC meeting in November.
How is the rand positioned?
The big event on the horizon is the ANC National Conference in December. That’s if it actually goes ahead. Besides that, the country’s economic trajectory is negative, the state capture revelations continue to mount, there is potential for another cabinet reshuffle and another round of ratings downgrades aren’t out of the question.
The rand is probably in for a bumpy ride over the next few months. We would assume that a lot of the risk and bad news is already priced into the currency. Therefore, any good news will probably be met by strength, while bad news may see a muted response.
USDZAR weekly chart
Over the past year we have seen rand strength as well as dollar weakness. The dollar is oversold, and may well bounce back if the US congress can pass a tax reform or infrastructure investment bill.
Above 13.70 we would be looking at a trend change driven either by dollar strength or rand weakness – or both. That’s a very likely scenario if we don’t have any good news on the local front.
The rand strength scenario would only come into play below 12.70. For that to happen we would probably have to see the Zuma faction within the ANC lose control of the ANC and the government. It’s unlikely, but would lead to a massive gain for the rand.
GBPZAR weekly chart
The rand/pound chart has already broken out of its trading range, following a strong move from the pound. The markets will have to digest Theresa May’s speech in Florence before we know if that strength is likely to continue.
The line in the sand for the rand against the pound has always been 18, which is where it is now. The pound has been under pressure all year, and when it does bounce back it’s going to be strong move. If that move has already started, we will see the rand under pressure against sterling for quite some time. If not, the pair may move back into the trading range - this time with increasing volatility.