South Africa's output and prices on sight

Last week's 25bp rate hike in the SARB's repo rate to 6.25% ensured that the ZAR not only recovered from an all-time low of 14.44/USD, but also that the ZAR outperformed most of its emerging market currency peers on the week. According to the SARB's accompanying policy statement, the heightened ZAR volatility level should be expected due to the prospect of higher US policy rates and once again cited the exchange rate as one of the biggest upside risks to its price stability mandate. 

The market is discounting a 90% probability that SARB will hike policy rates by a further 25bp at the January MPC meeting and these  expectations could increase even further this week because it is believed that both Tuesday's local GDP (Q3) and Thursday's PPI (Oct) data could surprise to the upside. More specifically, GDP growth is expected to come in at 1.4% (q/q, SAAR), compared to a consensus and previous reading of 1.0% and -1.3%, respectively.  

Meanwhile, PPI inflation is expected to rise from 3.6% y/y to 3.9% y/y, while the market has pencilled in a more moderate 3.6% y/y growth rate. It is also believed that the ZAR remains particularly vulnerable to the onset of Fed tightening and accordingly recommend that ZAR investors continue to fade ZAR rallies into year-end. 

"We would not be surprised if next week's local data provide an ideal opportunity for ZAR bears to reload at better entry levels", says Barclays.