(05 JUNE 2019)DAILY MARKET BRIEF 2:ZAR weakening as headwinds strengthens

The change in tone from the South African Reserve Bank is more than understandable. Although Cyril Ramaphosa emerged victorious from general elections, political, structural and growth uncertainties weigh on the South African economy and ultimately its currency, which is losing steam this week. The SARB is now signaling a rate cut for early 2020 to 6.50%.

The surprise came from SARB as it confirmed a rate hike for 2019 in its prior statement, while it adjusted its growth and inflation (headline + core) forecasts to 1% (prior: 1.30%) and 4.50% (prior: 4.80%). Yet in addition to the release of 1Q GDP figure, with quarter-on-quarter down 3.20% (prior: 1.40%), largely below expectations of -1.60% and lowest in 10 years, including flat year-on-year growth data (prior: 1.10%), further risks need to be considered. Restructuring of the heavily indebted energy department and current debates on Cabinet reshuffle, scope of SARB's mandate should maintain the ZAR under pressure until positive resolutions emerge.

USD/ZAR is currently trading at 14.6830, approaching 14.80 short-term.