Trading the SARB rates decision

A consensus of estimates derived from Bloomberg and Reuters polls suggest in majority, that the South African consumer will feel the slight relief of a 25-basis point (0.25%) cut to lending rates. The expected cut falls in line with a trend of global monetary easing at present, most notably in the US where rates are expected to be cut at the end of July (by at least 25 basis points as well). The SARB’s mandate is to manage inflation (within a 3% to 6% band) and protect the stability of the rand. A lowering rate cycle now expected in the US should provide further leeway for the SARB to provide a more accommodative monetary policy stance.

In the previous MPC meeting the SARB guided towards a cut in interest rates in the first quarter of 2020. Since this meeting, Reserve Bank Governor Lesetja Kganyago, has said that monetary policy in South Africa although accommodative could be more so, furthering the suggestion of a rate cut to come at Thursday’s meeting. While the SARB’s mandate is not to target economic growth, the Reserve Bank will be cognisant of the dismal Q1 2019 GDP report of a significant economic contraction (3.2%) in the first quarter of the year.

Trading the MPC meeting

The ZAR

The rand has been relatively strong leading into the meeting, although much of its strength is accredited to softer developed market currencies (dovish US Fed and Brexit uncertainty).

The 25-basis point rate cut scenario may not have too high an impact on the rand’s movement as it is the expected outcome. The outlying scenarios of a 50-basis point (0.5%) rate cut, or no change to lending rates, are perhaps the outcomes with the potential to move the domestic currency more significantly. A 50-basis point cut would assume a short term weakening of the rand, while the ‘no change’ scenario would be expectant of rand strength to follow.

The technical picture of the USD/ZAR currency pair shows the price to have found support at the R13.85/$ level. The pair does look as if it is reversing off this level at present. A surprise outcome in the form of a larger than expected rate cut, would suggest R14.25/$ as the initial upside target. A surprise outcome in the form of no rate change, could see the USD/ZAR moving back towards the R13.85/$ level, a break of which would favour R13.65/$ as the next level of support.

The retail sector

Historical easing rate cycles have been positive for the retail sector. Lower rates assume less pressure on the consumer and an improved debt appetite. Recent results from major retailers highlight a weak economy and pressured consumer, with little suggestion of a turnaround in the near term for these counters. However, a rate cut (or larger than expected rate cut) might help short term sentiment within the sector to provide traders a short-term trading opportunity.

Retail shares traders might consider adding to a watchlist leading into the announcement are:

• Woolworths Group Limited
• Truworths International Ltd
• Foschini Group Ltd
• Shoprite Holdings Ltd
• Clicks Group Ltd
• Mr Price Group Ltd

Shoprite – Technical Setup

The share price of Shoprite trades in a broad range between levels 15250 (support) and 17300 (resistance). The price has recently reversed off the support of this range. The reversal has been supported by a sharp movement by the stochastic out of oversold territory. These are bullish indications in technical analysis terms with range resistance at 17300 now the favoured upside target. Should the share price instead move to close below range support at 15250, the bullish indications would be deemed to have failed.