South Africa raises interest rates 0.5% in line with expectations but not in line with the hopes of the general public!
Inflationary pressures in SA have finally come to the fore and there’s only one thing to do – raise interest rates. What a lot of people forget is that the SARB is mandated by the government to control and affect the economy solely through monetary policy .ie. the only tool/solution available to the Reserve Bank is interest rates. Raise, drop or hold steady. Their hands are tied and in an inflationary environment the simple, and as it turns out the only, choice is to raise interest rates.
The UK also cut interest rates this week which has made GBPZAR a very attractive sell. The lower UK rates coupled with a higher interest rate environment in SA make it appealing for investors to sell GBP and buy ZAR thus disinvesting out of a ‘relatively’ lower yielding currency in a falling interest rate cycle, into a higher yielding currency in a rising interest rate cycle. It’s a simple strategy and a pretty good ‘carry trade’ in light of what is presently available in the market at the moment.
So the bottom line is this: Fundamentally the ZAR isn’t great. We have persistent inflationary pressures within a strongly rising interest rate environment, political instability, a trade deficit at 8% of GDP…….blah blah blah. It’s pretty hideous actually! But the market clearly thinks it’s more of a hideous idea to buy USD, GBP than to buy ZAR. It’s all about ‘relative hideousnous’! I don’t even think that’s a word but you get my drift. The market seems to prefer to buy ZAR than to buy GBP and USD.
Traders don’t necessarily buy a particular currency because they like it – they just hate it less than other available currencies. So a good way to put it would be to say that the market currently hates the ZAR less than it hates the GBP and USD.
I personally don’t see anything majorly attractive in the ZAR except that I know that I can earn an interest rate premium of 5-7% pa by holding ZAR than most other major currencies.
So for the week ahead.
The market has dropped significantly since the highs at 14.65 nearly 2 weeks ago. Interbank has nearly touched 13.50 which (just like the aggressive rise up to 14.65) is probably a little overdone as well. It’s all about probabilities and they are highly skewed towards the ZAR settling in the current range and possibly even moving slightly weaker from here to a more equilibrium type of level around 14.00
It is Christmas though and, generally speaking, 10 cent moves now become 20 cent moves, and 40 cent moves not become 70 cent moves. Liquidity leaves the market and volatility rears its ugly head!
So buckle up into that sleigh and don’t be surprised if the markets get a little hairy over the next few weeks (particularly with all the political jostling going on)
Technical levels become less important once liquidity dries up as there is no-one around to defend key levels anymore. It’s far easier for the market to break these levels so I don’t really see the point at this time of year to be paying too much attention to levels. My advice at this time of year is not to try be too clever as the market can move very quickly in either direction. Play good defence over Christmas – not good offence.
Personally, from current levels I would be looking to play for a weaker ZAR but with realistic expectations of GBPZAR and USDZAR gravitating towards 14.00 and 6.90-7.00 towards year end. I suspect investors worldwide will be looking to realize and cash in on short USD positions held throughout the year (with bonus time just around the corner) so I would think the USD will generally be steady to slightly stronger which should benefit USDZAR and thus GBPZAR as well.
Good luck and all the best for the week ahead.
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