Fed Boosts Commodity Currencies

Fed Boosts Commodity Currencies

Swissquote Ltd  | Jul 11, 2019 11:37

Markets have become more confident that the Fed should cut its Funds Rate by a quarter of a percentage at its July meeting, giving commodity currencies a boost for a second straight session. South African rand follows a similar path, as South African President Cyril Ramaphosa is working hard to reassure investors and rating agencies of the credibility of the country’s institutions. In this regard, the reappointment of South African Reserve Bank Governor Lesetja Kganyago for an additional five year came as a positive headline ahead of next week monetary policy meeting, which is likely to put the ZAR under pressure.

Following the release of poor 1Q GDP figures, with quarter-on-quarter at -3.20% (4Q 2018: 1.40%) and year-on-year at 0%, South African authorities are under pressure to stimulate growth. The task is therefore highly challenging as the country faces hurdles relating to heavily indebted state-owned power utility company Eskom that requires restructuring amidst an over $ 30 billion debt and risk of a possible credit rating downgrade from Moody’s at its November assessment.

Despite underlying risks and inflation in line with target range, as shown by May year-on-year CPI at 4.50% (m/m: 0.30%), we expect the SARB to cut its Repo Rate by 0.25% to 6.50%, earlier than May forward guidance statement that hinted towards a rate cut for early 2020, thus expecting to add further headwinds on ZAR following the announcement.

USD/ZAR is now trading at 13.9480, a 3-month low, approaching support at 13.9148 (10/04/2019) short-term.

Disclaimer: While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein. This document does not constitute a recommendation o sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investment.

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Swissquote Ltd

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