As expected USDZAR has made a sharp move to the upside and we expect more strength. Despite the rise in the USD speculators hold the biggest short position since 2017 which points to more strength as these speculators are hit on stop. Our view of the fundamentals, sentiment, and technical levels to look out for are below.
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Inflation and Interest Rates
“South African inflation surged above the central bank’s target range for the first time in more than five years, raising the prospect of policymakers raising borrowing costs by the biggest margin in almost two decades this year.” ( BLOOMBERG)
At present we have interest rates at 4.75% but there expected to rise further. Interest rate futures are discounting a 60 basis points rise for the monetary policy meeting in July, and 186 basis points by the end of the year.
This indicates that there should be one 75-basis-point hike at one of the remaining three meetings coming up this year. So are rate rises bullish on the Rand? No, as the economy faces huge problems ahead.
Eskom Strike Over But Bleak Outlook Ahead
South Africa’s national energy utility, has struggled to provide power to users due to a strike this has now been resolved but it’s not bullish for the Rand. Eskom and its three recognized labor unions signed an agreement for a 7 percent salary increase a week which will of course fuel inflation further and also acts as a market for other workers in terms of wage rises.
Eskom, with its mountain of debt, will be hard-pressed to absorb the additional costs and they Note: “The overall effect of this agreement on the wage bill will be more than R1-billion over the period of the agreement. This of course will be a struggle for Eskom to afford.”
The power system will also take time to come back to full operational use: “It is important to note that while the workforce is returning to work, the system will still take some time to recover. As a result of the strike, maintenance work has had to be postponed, and this backlog will take time to clear.”
The problems with the power grid have been around for decades with blackouts and while the strike is over the problems in the power grid are not.
High Unemployment and Low Consumer Confidence
The unemployment rate in South Africa is a staggering 35 percent and is unlikely to get better soon. In terms of consumer confidence, the FNB/BER Consumer Confidence Index (CCI) plunged to -25 in the second quarter of 2022, it also slipped from -9 to -13 index points during the first quarter of 2022.
Economic Growth
the collapse in consumer confidence points to low disposable incomes which will impact on economic growth. Economic growth is also set to fall going forward: “After the strong Q1 2022 GDP outcome, the second quarter of this year is likely to record a contraction on the back of the flood damage in the KwaZulu-Natal province, and the ramp-up in electricity load shedding, along with the weakening in global demand and low confidence levels. (A Bishop HWMIIA)
The bigger picture for South Africa is gloomy is it relies heavily on exports and the global economy is slowing and could face recession. As global growth slows commodity prices look set to fall which will impact the South African economy going forward.
Sentiment
Large speculators and hedge funds despite the rise in the USD still hold their biggest short position since 2017. We expect these shorts to exit the market on stop and send the USD far higher.
Technical Analysis
The key support and resistance levels to look out for are on the chart below. Key support on both daily and monthly charts is 16.30 and the target on the monthly chart is 18.50.
