The USD/ZAR exchange rate has remained in a tight range in the past few months as the recent crash faded. It was trading at 17.40 on Friday, up slightly from the year-to-date low of 17.06. It remains 12.7% below the highest point this year.
South Africa inflation data and SARB decision
The South African rand moved sideways after the country’s statistics agency published the latest consumer price index (CPI) data.
According to the statistics agency, the headline annual inflation accelerated in September despite the tailwinds provided by the stronger rand.
The headline Consumer Price Index rose 3.4% in September, up from 3.3% in August as food prices remained at an elevated level. This inflation increase was in line with what analysts were expecting and was the highest level since July this year. It is also much higher than March’s 2.7%.
Core inflation, which excludes the volatile food and energy prices, has also been in a slow uptrend in the past few months, moving from a low of 2.9% in June to 3.2% last month.
These numbers mean that the South African Reserve Bank (SARB) may opt to maintain interest rates unchanged at 7% in the next meeting in November this year as it did in the last one in September. Still, data, especially the forward rate agreements, have a 60% chance that the bank will cut rates in that meeting.
On the positive side, the overshoot in inflation was in line with what the central bank governor, Lesetja Kganyago, noted recently. He said that while inflation was contained, it will be normal to anticipate some short-term overshoots.
South Africa inflation target
The inflation report came as Fitch, a major player in the credit rating industry, predicted that the National Treasury will formally lower the inflation target to 3% from the current range of between 3% and 6%. Such a move means that the central bank will at times leave interest rates at an elevated level for a while.
Meanwhile, the central bank governor has hinted that he would consider increasing his dollar reserves from the current $70 billion. He said:
“If the opportunity arises that we can continue to increase our reserves, we would do that. Suffice to say that the level of reserves that we have now, considering a number of metrics, is actually adequate.”
The next key catalyst for the USD/ZAR pair will be the upcoming US inflation report, which will come out on Friday. Economists polled by Reuters expect the data to show that the headline Consumer Price Index (CPI) rose to 3.1% in September from the previous 2.9%. Core inflation is expected to have remained at 3.1%.
USD/ZAR technical analysis
USD/ZAR chart | Source: TradingView
The daily chart shows that the USD/ZAR pair has been in a downtrend in the past few months. It has dropped from the year-to-date high of 19.93 in January to a low of 17.07 as the South African rand strength accelerated.
Most recently, it has stabilized because of the ongoing US dollar strength. It remains below the 50-day and 100-day moving averages.
Therefore, the pair will likely resume the downtrend in the coming days. If this happens, the next point to watch will be at 17.07, the lowest point this month. A move below that level will point to more downside, potentially to 16.9.
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