South Africa's SARB on hold with risk to hike

This week's highlight in South Africa will be Thursday's policy rate decision. Although the forward market is discounting a 70% probability of a 25bp increase in repo rate to 6.25%, economists are deeply divided over whether the SARB will actually invoke the second hike for the year. 

Economists have penciled in an unchanged decision, but are quick to acknowledge that heightened US policy hike expectations over the past fortnight, more hawkish language from some SARB MPC officials (including the governor) and a rise in break even yields have significantly increased the risk of a hike. 

"We have become more bearish about the ZAR over the medium term", says Barclays.

Even though the ZAR could temporarily recover some lost ground if the SARB does indeed hike rates this week, we would fade such a rally because a Fed hike at the December FOMC will quickly outweigh SARB actions over the coming weeks by restoring the interest rate differential and by creating a more risk-off trading environment, which is one of the reasons it is bellieved USDZAR will reach 14.50/USD by year end.