USDZAR price forecast: rand remains steady after local CPI inflation

Key takeaways:

1. Moderate Decrease in Inflation: In March 2024, consumer price inflation for urban areas saw a slight decrease to 5.3% from 5.6% in February
2. Key Drivers of Inflation: The annual inflation rate was significantly influenced by increases in housing and utilities, miscellaneous goods and services, food and non-alcoholic beverages, and transport costs
3. Shift in Goods vs. Services Inflation Rates: The inflation rate for goods fell from 6.2% in February to 5.7% in March, whereas the inflation rate for services saw a marginal rise to 5.0% from the previous month’s 4.9%.
4. SARB's Monetary Policy Outlook: The current outlook hints at a possible reduction in rates in the latter half of 2024
5. Influence of Global Monetary Policy Trends: The SARB’s decision-making regarding interest rate cuts will likely be influenced by monetary policy trends in developed economies

March CPI in brief

In March 2024, the Headline Consumer Price Index (CPI) for urban areas indicated that annual consumer price inflation decreased slightly to 5.3% from 5.6% in February, with a month-on-month increase of 0.8%. The main drivers of this annual inflation rate included housing and utilities, miscellaneous goods and services, food and non-alcoholic beverages, and transport, contributing significantly with increments ranging from 5.1% to 8.5% year-on-year. Notably, the inflation rate for goods decreased to 5.7% from February's 6.2%, while the rate for services experienced a slight increase to 5.0% from 4.9%.

SARB Monetary Policy / Rates Outlook

The slight tick lower in inflation will be welcomed by the South African Reserve Bank (SARB) but CPI remains elevated and closer towards the ceiling of the 3% to 6% targeted range. Current expectations suggest that rates could start to lower in the second half of the year through 25 basis point increments, at best three times (totaling 0.75% by the end of 2024). The SARB is likely to follow the lead though of developed economies such as the US to try stem capital outflows and protect carry trade opportunity. With the US Federal Reserve becoming a little more hawkish as of late and starting to lean away from the more dovish ‘pivot’, perhaps three rate cuts this year in South Africa is starting to look a little too optimistic.

USD/ZAR technical view

After a failed downside break, the USD/ZAR has produced a sharp bullish price reversal from around the 18.50 level and from oversold territory. The reversal has taken the price through the 19.00 level and is now testing the 19.10 level whilst in overbought territory.

Traders might look for either an upside break of the 19.10 level for long entry, or a bearish price reversal off this level for short entry.

Should the upside break trigger (confirm with a close above), the 19.30 to 19.40 range provides the upside resistance target from the move, while a close below the 19.00 level would suggest the move to have failed.

Should a bearish price reversal instead form off the 19.10 resistance level, confirmed with a close below 19.00, 18.80 becomes the initial support target, while a close above the 19.40 level might be used as a failure indication.