Fri. Aug 23rd, 2019

The Rand holds its breath ahead of US Fed rate cut

Last week, the Rand closed off on the back foot after being spooked by Fitch’s downgrade that took South Africa’s outlook from neutral to negative BB+.

the rand holds its breath ahead of us fed rate cut 1024x683 - The Rand holds its breath ahead of US Fed rate cut

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This news did not come as a surprise considering the government has inherited unreformed SOEs and an economy that is barely growing and is experiencing rapid fiscal deterioration.

USD-ZAR corrected lower throughout yesterday’s trade, signalling that the market may not be a one-way bet just yet, despite the recent rating news and Eskom bailout. In the week ahead, we look to exogenous drivers as the main influencers of the Rand.

This will most likely include the
US Federal Reserve, which will decide whether to cut interest rates
or not. The Rand is very much negatively correlated to the US Dollar – meaning,
what is good for the Dollar is bad for the Rand and vice versa.

Markets are well-positioned for a rate cut on Wednesday, but what matters more is the signal the Fed gives regarding future decisions. A more upbeat tone could indicate that one more rate cut is coming this year, which could cause the Dollar to rally and negatively affect the Rand.

5e71ca2c 2019 07 30 the rand report - The Rand holds its breath ahead of US Fed rate cut

The other important event is the release of
Chinese Manufacturing PMI data on Wednesday, which is forecast to show a
recovery of 49.6 from 49.4. Both Chinese and global manufacturing have been hit
lately and investors will be watching the July PMI data for signs as to whether
the trend is set to continue. If forecasts are accurate and the outlook has
improved, the Rand and other emerging market currencies could gain a lift.

While there isn’t much data this week, it
may contribute to the debate about the state of the South African economy, triggered
by the Fitch downgrade.

Tuesday sees the release of the unemployment
rate for Q2. It reached a two-year high of 27.6% in Q1. Analysts will be watching
to see if the upward trend continues. If there is an even deeper contraction,
it could increase concerns about the economy and the threat of a downgrade.

Market
event calendar

Tuesday 30 July

  • Unemployment Rate Q2: A decrease in the figure is seen as positive
    (or bullish) for the Rand, while an increase is seen as negative (or bearish).

Wednesday 31 July

  • Trade Balance: If a steady demand in exchange for South African
    exports is seen, that would turn into a positive growth in the trade balance,
    and that should be positive (or bullish) for the Rand.

Thursday 1 August

  • Total New Vehicle Sales: Considered
    as an indicator for the overall economic climate.

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