Rand price firms temporarily after inflation points to larger rates increase

Rising trend of local CPI inflation expected to continue

Consumer Price Index (CPI) data released by Statistics South Africa (StatsSA) has shown domestic inflation for May 2022 to have increased by 6.5% on an annualized basis.

While local inflation was expected to breach the Reserve Bank’s 6% ceiling in May’s CPI report, the figure stretched past consensus estimates of around 6.2%.

The chart above shows the actual annualized CPI data trend over the last 2 years. Over this period, we have seen a sharp upward trajectory maintained with inflation now at its highest levels in 5 years.

Fuel (particularly diesel) and food prices were major inputs to the rising figure, highlighting the effect of ongoing geopolitical tensions and supply chain disruptions now reflecting on our local economy.

The June 2022 CPI report scheduled for next month (July) is expected to further reflect a sharp weakening of the ZAR and more dramatic increase in the petrol price (R2.33/litre). This suggests a continuation in the upward inflation trend with 7% annualized now a feasible target.

Interests rates likely to increase more than originally anticipated

When we couple accelerating inflation with the accelerating trajectory of monetary tightening globally, particularly in the US, the suggestion is that probability leans towards at least a 50 basis point hike at July’s Monetary Policy Meeting (MPC) from the South African Reserve Bank (SARB).

It would appear that rates in South Africa are now rising at faster pace and double the magnitude originally forecast at the beginning of the year by the SARB’s quarterly projection model. The bank will take some respite from GDP growth in the first quarter exceeding expectations, creating some wiggle room for tighter policy.

The Rand

The rand has firmed slightly post the news but remains weak on a relative basis and subject to global themes dictating direction.

Federal Chairperson Jerome Powell’s testimony to the senate over the 22nd and 23rd of June provides the dominant news catalyst over the next few days to influence risk sentiment likely to reflect on emerging market currencies such as the rand.

ZAR - Technical View

Excerpt from the Technical Tuesday, full report available here

The USD/ZAR has now moved into a short term consolidation following its recent rally. The consolidation for the currency pair is currently considered between levels R15.70/$ (support) and R16.20/$ (resistance).

In lieu of the aggressive preceding rally / trend higher, traders might still prefer keeping a long bias to trades on the currency pair for the time being, looking for either a bullish reversal off the R15.70/$ support level, or break above resistance at R16.20/$ for entry.

Should the R15.70/$ support level instead be broken, our preference would be wait out a move lower and reevaluate our current long bias to trades on the currency pair.