The South African Rand came under pressure on Tuesday on news reports that the finance minister, Pravin Gordhan was issued summons to appear in court on corruption charges on November 2.
It was for the time when Gordhan was in charge of the tax collection department over a year ago. The finance minister maintained that the allegations were politically motivated. Following the news, the dollar surged, gaining over 3.90% to close the day at 14.358 rand with even the equity markets taking a hit especially with the banking sector in the Johannesburg Stock Exchange falling by over 5 percent.
The South African rand has come under pressure since early August, ever since the news of the corruption charges against the finance minister came to light. Back in late August, the dollar touched a monthly high at 14.70 rand before resuming its decline on better than expected economic data. As noted in the previous commentary on USDZAR, the second quarter GDP showed a strong recovery with a 3.30% gain in the second quarter. The SARB left interest rates unchanged at 7 percent in September with inflation seen improving to the central bank’s target range.
SARB – October Monetary Policy Review
The central bank released its latest twice a year monetary policy review earlier in October. The central bank noted that inflation is expected to average 6.4% this year and is expected to breach the inflation target range until the second half of 2017 with risks to inflation outlook more evenly balanced. The SARB’s interest rate was left unchanged at 7.0% since March 2016, but the MPR noted that the cycle of stability in rates could come to an end.
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Earlier in October, the IMF issued new forecasts for South Africa. It left 2016 growth forecasts unchanged at 0.10% (lower than the central bank’s 0.40% growth forecast) and lowered 2017 growth to just 0.80% (again, lower than the central bank’s projection of 1.20%). The low forecasts came as the IMF cited “the effects of lower commodity prices, high unemployment and policy uncertainty on the economy.”
SARB: The bar for loser monetary policy is high
The most important take away from the October’s MPR was the expectations on monetary policy. The central bank said “At present, the policy rate remains at the 7,0 per cent level reached in March of this year. Should conditions develop in line with the current forecasts, it may at some point become possible to conclude the policy tightening cycle. However, the bar for loosening policy is high, requiring a substantial, sustained improvement in forecast inflation bringing it more comfortably within the 3–6 percent target range.”
USDZAR – Technical Outlook
USDZAR posted a strong reversal off the support zone of 13.56 – 13.39 as noted in the previous commentary. Following the strong gains yesterday, USDZAR is seen hovering near 14.36, which is the early/mid-April support that was formed. The strong gains from yesterday could see price consolidating or pulling back lower. Initial support is seen at 14.00 while to the upside; there is further room for gain towards 14.65 – 14.73 region. In the longer run, USDZAR could potentially be seen rising towards 15.42 – 15.63 resistance level that was established in early May this year. This scenario is supported by the fact that the US dollar is likely to post further gains in the run-up to the December rate hike, albeit the short term volatility on account of the US presidential elections. Besides the fundamentals, the political developments in South Africa will also need to be closely watched.
