ZAR: Continuous improvement – Commerzbank

The South African Rand intraday reached a one-year high during yesterday’s trading session, pushing USD/ZAR below the 17.7 level. However, the ZAR gave back some of its gains in later trading, Commerzbank’s FX Analyst Volkmar Baur notes.

Disinflation paves the way for lower interest rates

“Yesterday’s movement was driven by better-than-expected producer prices. These fell to an annualized rate of 4.2% in July, down from 4.6% in June. On average, analysts were expecting a drop to 4.5%. This is another positive signal for the SARB, which could start cutting interest rates as early as September.”

“Normally, rate cuts are always associated with a weaker currency. However, the situation in South Africa is somewhat different. The disinflation here is not due to a weakening of demand, but to a structural improvement on the supply side. There have been no power cuts in South Africa for several months, which may not sound very impressive at first, but this has not happened in South Africa for years.”

“Disinflation is therefore paving the way for lower interest rates, which could lead to further investment and ongoing structural improvements. This positive development reduces the risk premium that the foreign exchange market has placed on South Africa in recent years and strengthens the Rand.”