The South African Reserve Bank (SARB) is set to release its last interest rate decision for 2020 on Thursday 19 November, with a consensus that rates would stay on hold at 3.5%.
The South African economy was already facing severe economic headwinds even before COVID-19, as the government was facing challenges of spiking unemployment, power outages that severely impacted its manufacturing base, and state agencies riddled with debt and on the verge of collapse. When the coronavirus pandemic hit the African continent, South Africa was the hardest hit and continues to hold the highest case counts in Africa.
Against this backdrop, the SARB was forced to engage in a relentless rate-cutting cycle to spur economic growth, even as it attempted a bailout of the ailing state-owned power company Eskom and the South African Airlines.
After the 3.5% rate hold in the September 2020 meeting (a split decision), the SARB Governor announced that further rate cuts would not help improve business and consumer sentiment, hinting that the bank may not cut rates this time around. The SARB’s focus now seems to be shifting towards more structural reforms and not on more monetary easing, given that the inflation target of 3-6% has mostly been met.
The consensus is that the SARB would leave rates unchanged at 3.50%.
Technical Levels to Watch
The Rand is coming off a bullish run, as emerging market currencies have generally been firmer against the greenback. The Rand has been riding the wave of demand for risky assets that was spurred by last week’s Phase 3 results provided by Pfizer and BioNTech for their coronavirus vaccine candidate. Monday’s announcement by Moderna Inc on its vaccine candidate could strengthen this sentiment.
A rate hold may allow the Rand to maintain the status quo, with the pair would look to sustain the breakdown of the 15.50 mark, allowing the USDZAR to target the 15.32751 support (9 October 2019 high), with a good chance of also attaining 15.21122 if the pair continues its decline.
On the flip side, a rate hike or a rate cut would be a market surprise. A rate hike could further strengthen the Rand, sending it below the $14 mark. A rate cut could be a weakening factor, which may promote a sideways orientation that sees 15.50 as the floor and 16.07092 as the ceiling.
USDZAR Daily Chart