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After raising its key interest rate to 6.75% in November, the South African central bank (SARB) has since left it there. And we do not expect any change at today's meeting either. The focus of the markets is likely to be on the statement and the inflation and key interest rate projections. Yesterday's inflation data for April was weaker than expected. At 4.4% and 4.1% respectively, the headline and core rates are comfortably in the lower half of the target corridor of 3%-6%.
We, therefore, expect the SARB to slightly lower its inflation forecast for 2019. However, the headline rate is likely to rise again well above 5% in the coming quarters, above all due to higher oil prices and administered price increases for electricity and water. This could also push up inflation expectations, which had fallen below 5% for the first time and which the SARB wants to anchor in the middle of the target corridor. It should, therefore, remain cautious with regard to the medium-term inflation outlook and the interest rate outlook and remain vigilant and ready to act on upside risks to inflation. Such a stance is likely to support the rand.
Finally, ZAR appears slightly overvalued. ZAR currently screens 3.7% overvalued in our BEER FV model. This is moderate compared to the 8% standard deviation of the model. In terms of the medium-term outlook, our economist projections currently point to the overvaluation extending to 5.6% by the end of 2019. This is driven by higher debt/GDP and lower real yield differentials.
We have stayed MW on ZAR and even recommended a USDZAR diagonal credit put spread (1m/3m 14.67/13.76, spot reference: 14.45 levels) on hopes of a global growth recovery but renewed local and external risks are likely to prove challenging. Courtesy: JPM & Commerzbank
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 21 levels (mildly bullish) while articulating at 12:43 GMT.
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
