ZAR: Rand Trading at Best Levels of the Week as 3x6 FRAs Hit 19-Month Low

Markets continue to price looser monetary policy in South Africa, with 3x6 FRAs today returning to the late-August cycle lows. However, we continue to flag that pricing of easier policy has not impeded ZAR strength, with this atypical relationship arising due to the important role of structural supply-side improvements in reducing South Africa's risk premia, as opposed to the more conventional relationship of loose policy being associated with weaker FX.

• Electricity data released earlier today adds to the increasingly positive picture. Production at +8.5% Y/Y in July marks the fastest pace since mid-2021's COVID-related anomalous reading and the fourth highest since records began in 2006 - a more concrete sign that loadshedding issues that dragged the economy across late 2022 and early 2023 are fading fast.
• On an intraday basis, a confluence of positive factors has aided the rand’s sustained recovery off Wednesday’s lows, including a near 1% rally in spot gold and continued fade in the USD index. Given that price action has predominantly been a function of the global picture, focus will shift to the US NFP release tomorrow after today’s ADP data confirmed an apparent weakening trend of the US labour market.
• From a technical standpoint, a bear threat in USDZAR remains present. The break lower in August confirmed a resumption of the downtrend, maintaining the price sequence of lower-lows and lower-highs. This paves the way for an extension towards 17.5713, the Jul 28 ‘23 low, and 17.4193, the Jul 27 ‘23 low and next key support.