Weekly Outlook: Central Bank Decision To Set Tone For SA Rand

Fundamental: While the central bank is widely anticipated to hike rates 50 basis points to 8.50%, there is a distinct possibility that the monetary policy committee could be forced to tighten even more drastically as SARB Governor Tito Mboweni has recently stated that  the high rate of credit extension has become a major cause for concern for the Bank?These developments pose a threat to the inflation outlook, and have prompted the Monetary Policy Committee to raise the repo rate by 50 basis points at each of the past two MPC meetings.  <For Full Story See Below>

Full Story: The South African rand steadily lost ground throughout the past week as USD/ZAR rallied from a low of 7.5602 to a high of 7.9741. ZARs losses came despite a slew of inflationary data that essentially guarantees a 50 basis point hike to 8.50% by the South African Reserve Bank when they meet October 11-12. However, the recent declines in commodity prices, especially gold and diamonds, have taken their toll on the national currency.

The week going forward will be one of importance for the South African rand, as the SARB meets for two days starting on October 11. While the central bank is widely anticipated to hike rates 50 basis points to 8.50%, there is a distinct possibility that the monetary policy committee could be forced to tighten even more drastically as SARB Governor Tito Mboweni has recently stated that  the high rate of credit extension has become a major cause for concern for the Bank?These developments pose a threat to the inflation outlook, and have prompted the Monetary Policy Committee to raise the repo rate by 50 basis points at each of the past two MPC meetings. Other data set to be released this week includes SACOB Business Confidence, and with a narrower trade balance on the return of global demand for South African based exports, business confidence should remain optimistic.  Although dipping marginally in the last month and printing the lowest figure since November of 2004, expectations remain high of a rebound back to the two year average of 100 as the economy is poised to continue on supported strength. Also on the agenda is the release of net and gross reserves for September. The central bank is likely to have purchased more dollars, as they did last month to reach $24 billion, in order to ease concerns over the country's current account deficit. Additionally, retail sales for July could slow further from the annual rate of 9.1% after seven consecutive interest rate cuts in the 22 months through April 2005 spurred a furious pace of spending. Since then, sales have dwindled and the prospect of further hikes will do little to help to accelerate growth. Wrapping up the week will be manufacturing production for the month of August, which should see further declines following Julys drop of 0.7% from June. Similar to retail sales, rate hikes on the part of the SARB have hurt businesses and dissuaded manufacturers from boosting output.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Regional data last week should normally have lent strength to the ZAR, but lower commodity prices created a negative environment for the currency.  First, PPI for the month of August jumped more than expected by 1.5%, and while the rise was slower than Julys gain of 1.7%, the annual rate skyrocketed up to 9.2%. The producer price figure highlights the inflationary scenario that the SARB is so concerned about and which demands vigilance. Another measure of price pressures in the economy, M3 money supply, rose 21.35% in August to bring the level to 1261.8B. Another nail in the coffin for interest rate hikes came from the release of private sector credit, which bounded higher to an annual rate of 25.03%. This is another area of growth in which the central bank will be eager to put a cap on by tightening policy. Finally, the posting of the trade balance and Investec PMI should bode well for the SACOB business confidence indicator due out next week. The trade deficit narrowed to -5.284B in the month of August, and although the report did not quite meet expectations of -5.000B, the balance is still an improvement from Julys dismal -7.746M. Additionally, Investec PMI in the month of September was released at an expansionary level of 56.3 from a downwardly revised 58.9 the month prior. Although PMI could indicate declines for manufacturing production due out next week, the rapidly weakening rand may make South African exports more competitive and give a much needed boost to export growth.

Economic Releases for October 4 October 11

Technical: USDZAR We mentioned last week that price currently trades above the upper Bollinger band (daily) a daily close above would favor a breakout and focus would then shift to the 1/16/2004 high at 7.5774.  The pair has blown by 7.5774 and tested 7.9740 today.  Daily oscillators are overbought and exhibit bearish divergence but resistance is not until the 5/28/2003 high at 8.3450.  Projecting a trendline parallel to the one drawn through 6.0263 and 6.7050 intersects with 8.3450 next Wednesday (10/11).  Initial support is at the 9/25 high at 7.7276.  A dip below there would begin to suggest that a deeper corrective move is underway.    

Key Levels & Technical Indicators