The South African rand last week had another poor market performance, compliments of a pessimistic view on the country’s growth capabilities.
A deteriorating economic outlook largely contributed to the rand’s recent weakness. With widespread poverty and unemployment nearing 50%, the country is in a weak position. The poor-performing government and unstable electricity supply are persistent factors deterring foreign investment. A contracting manufacturing sector, coupled with rising debt obligations, provide additional reasons for concern. This complex collection of systematic deficiencies leaves little hope of stimulating a prosperous growth environment.
South Africa’s most-recent inflation print was released on Wednesday. The inflation rate was recorded at 7.2% in December, in line with market expectations. Although this was the lowest inflation reading recorded in the last six months, current price pressure remains above the South African Reserve Bank’s (SARB) upper bound for acceptable inflation. This indicates that further price cooling must occur in order to reach a sustainable level.
For global currencies, the GBP surged in strength as a result of the inflationary pressure that remains well above the UK’s 2% target. The most-recent inflation rate of 10.5% indicates that hawkish monetary policy will remain as the dominant stance. Interest rates are likely to rise considerably further to curb inflation. The impact of this on interest rate expectations has resulted in gains for the Pound.
Conversely, the US Dollar encountered some market adversity. The Dollar Index declined by 0.17% last week, courtesy of softening interest rate expectations. The Fed is likely to be the first major central bank to begin the tapering of rate hikes, which has added weight to the Dollar. The US Dollar fell by 1.45% against the Pound, a currency that had some significant tailwinds in recent trade.
Despite this bout of greenback weakness, the rand remained outmuscled. The USD/ZAR pair gained 1.80% during last week. After opening at R16.80 and topping out at R17.38, the pair ended on Friday at R17.10
The EUR/ZAR pair made a similar move to the upside, appreciating by 2.05%. After kicking off at R18.19 on Monday and reaching R18.81, the pair closed at R18.56
The GBP/ZAR pair was the biggest mover, as recent GBP strength left the sterling deep in the green. The GBP/ZAR pair moved a whopping 3.20% higher, from an open of R20.55. After briefly flirting with the R21.50 resistance level, the pair rounded off the week at the R21.20 level.
The South African interest rate decision will be released on Thursday. After the 75-basis-point increase in the previous meeting, markets are anticipating another 50-basis-point rise in interest rates, up from 7.0% to 7.5%. This would be the eighth consecutive uptick in the SARB’s benchmark repo rate, to bring inflation down towards the midpoint of their target band. Any surprise to the upside will likely lead to a short-term rally. Markets are likely to watch this data event closely and continue to observe developments surrounding South Africa’s economic growth expectations.
Upcoming market events
Tuesday 24 January
ZAR: SACCI business confidence (Dec)
AUD: NAB business confidence (Dec)
GER: GfK consumer confidence (Feb)
Wednesday 25 January
AUD: Inflation rate (Q4)
Thursday 26 January
ZAR Interest rate decision
ZAR: Producer price index (Dec)
USD: Gross domestic product growth rate advanced (Q4)
USD: Durable goods orders
Friday 27 January
USD: Personal income (Dec)
USD: Personal spending (Dec)
AUD: Producer price index (Q4)
EUR: ECB President Lagarde speech
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