Markets have become more confident that the Fed should cut its Funds Rate by a quarter of a percentage at its July meeting, giving commodity currencies a boost for a second straight session. South African rand follows a similar path, as South African President Cyril Ramaphosa is working hard to reassure investors and rating agencies of the credibility of the country’s institutions. In this regard, the reappointment of South African Reserve Bank Governor Lesetja Kganyago for an additional five year came as a positive headline ahead of next week monetary policy meeting, which is likely to put the ZAR under pressure.
Following the release of poor 1Q GDP figures, with quarter-on-quarter at -3.20% (4Q 2018: 1.40%) and year-on-year at 0%, South African authorities are under pressure to stimulate growth. The task is therefore highly challenging as the country faces hurdles relating to heavily indebted state-owned power utility company Eskom that requires restructuring amidst an over $ 30 billion debt and risk of a possible credit rating downgrade from Moody’s at its November assessment. Despite underlying risks and inflation in line with target range, as shown by May year-on-year CPI at 4.50% (m/m: 0.30%), we expect the SARB to cut its Repo Rate by 0.25% to 6.50%, earlier than May forward guidance statement that hinted towards a rate cut for early 2020, thus expecting to add further headwinds on ZAR following the announcement.
USD/ZAR is now trading at 13.9480, a 3-month low, approaching support at 13.9148 (10/04/2019) short-term.