Weak global growth suggests limited rate hikes for SARB

The global rebound has sputtered as even a rate cut from China failed to calm nerves. After having dipped below 13.00, USD/ZAR opens at 13.10, waiting for direction. Volatility remains elevated in the crosses: EUR/ZAR traded a large 14.80 - 15.30 range yesterday and opens at 15.10.

Wall Street ended down again last night, with sharp losses at the close unwinding earlier strong gains. And even Chinese markets have failed to make any headway - despite the central bank cuts of 25bp in rates and 50bp in reserve requirements. All this leaves markets nervous and yesterday's risk-on rally has petered out. 

US and Chinese equity markets will continue to set the tone, with the rand and global markets trailing behind. Data in this environment will not have much impact. With volatility easing somewhat, we are left to make sense of all the major changes.

Key questions at this stage are: How fast is China's economy slowing? What is the impact for the rest of the world? Will Fed hikes be delayed, or even annulled? And is all this a net positive or negative for risk assets and the rand?
 
To confuse matters even further, yesterday's local GDP data pointed to a very weak economy, leading to questions about how much further the SARB will hike rates.

"While we all knew that the economy was struggling, the -1.3% q/q 2Q15 local GDP growth rate comes as a negative surprise. And while some temporary negatives such as the contraction in agriculture could reverse, we now expect growth of 1.7% at best in 2015, with a deceleration into 2016 (possibly below 1%). We are in the process of compiling a detailed review of our growth forecasts, to be published this week", notes RMB.

The contraction strongly supports the repo rate view. The rand can pressure another 25bp hike, taking the end point of the cycle to 6.25%. Further hikes, however, seem unlikely, and with the weak growth backdrop, it is possible that the SARB could start cutting rates next year.