Rand Price Trades Firmer After SARB Hike Rates and Risk off Sentiment Pauses

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SARB raises lending rates with some members looking increasingly hawkish

The South African Reserve Bank (SARB) has raised lending rates by 75 basis points (0.75%), bringing the repurchase rate to 6.25% from 5.5%, and the prime lending rate to 9.75% from 9% previously. Three members were in favour of a 75-basis point hike, while two members would have preferred a 100-basis point hike.

Inflation guidance moderates, growth outlook revisions mixed

The SARB’s forecast for headline inflation is unchanged at 6.5% for 2022, revised lower to 5.3% in 2023 (from 5.7% previously). Upside risks to estimates remain primarily in the form of energy and food prices as well as rand volatility.

The SARB now expects the local economy to grow by 1.9%, (from 2.0% previously forecast). Gross Domestic Product ( GDP ) growth of 1.4% and 1.7% is expected in 2023 and 2024 respectively, slightly higher than the central banks previous forecasts.

Rand mostly firmer on MPC decision and brief pause in risk off sentiment

News that some policymakers had moved to a decidedly more hawkish policy stance (having favoured a larger rate hike than was realised), has helped see a firmer footing for the rand. The rand has been one of the better performing BRIC (Brazil, Russia, India & China) currencies against the US dollar on the day of the rates announcement as highlighted by the chart below.

Source: IG Charts

The below chart shows how the rand has firmed against the dollar beyond several of its commodity-based currency peers including the Australian dollar (AUD), Brazilian real (BRL), Canadian dollar (CAD), Mexican Peso (MXN) and New Zealand Dollar (NZD).

Source: IG Charts

Rand strength has been evident against developed market currencies as well. The move against these currencies does however show some short-term relief as risk off sentiment pauses after the previous days escalation post the Federal Reserve’s hawkish monetary policy guidance.

Source: IG Charts

USD/ZAR – trading view

USD/ZAR – trading view

Source: IG Charts

The USD/ZAR has now started to pullback from overbought territory. The short-term pullback underway does however find place within a longer-term uptrend.

This does suggest that dollar weakness / rand strength may only be temporary before we see the resumption of dollar strength/zar weakness.

In turn, traders of the USD/ZAR might prefer to see a pullback towards at least the R17.15/$ mark before starting to look for long entry on the currency pair. Long entry would be considered on a bullish price reversal marking the end of the pullback.

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