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USD/ZAR to weaken towards 14.00 by end of this year, says Commerzbank

One day ahead of the SARB’s rate decision, inflation figures for June will be released today. Both the headline and the core rate are expected to decline slightly. In April the headline rate returned to the central bank’s target corridor of 3–6 percent for the first time since the end of June; its most recent reading was 5.4 percent.

Another slowdown in inflation will fuel rate cut speculation, as the central bank is expected to use the leeway provided by a more favourable inflation outlook to reduce the key rate and thus prop up weak growth. In all likelihood, the SARB will keep its key rate unchanged at 7 percent for the time being though.

At its most recent meeting, the SARB had signalled that the rate-hike cycle was over, but said at the same time that it was too early for rate cuts. A significant rand depreciation is a risk factor for the inflation outlook.

ZAR had come under significant pressure after the dismissal of finance minister Pravin Gordhan at the end of March and subsequent rating downgrades as well as political discussions about the mandate and the independence of the central bank, but recovered relatively quickly. However, this recovery appears to owe more to the general risk-on sentiment than to a clear direction of South African policy.

"We expect USD/ZAR to weaken towards 14.00 by the end of the year," Commerzbank commented in its latest research report.

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