ZAR: Weakness in Commodities, China Equities Prompts 1% Rally in USDZAR

Given China is the largest buyer of South African commodities, weakness in Chinese equities and the associated slip in industry metals is accounting for the rand’s notable underperformance in the EMEA region. The acceleration in topside USDZAR momentum this afternoon may be attributable to the sustained recovery in the USD index from this morning’s lows, with today’s ~1% rally for USDZAR resulting in a breach of the 50-day EMA at 18.3456. An extension higher could expose the Jun 2 high of 18.6627.

• A lack of major policy support following the Third Plenum prompted additional weakness in Chinese equities, with the risk-off moves working against relevant commodities – in particular iron ore and copper futures have slipped to multi-month lows.
• Market pricing of a more dovish policy mix may also be providing a headwind to the rand. Bank of America wrote in a note that they see 25bps of easing at each of the SARB meeting in September, November, January and March. Moreover, they believe the latest forecasts open up the possibility of an outsized cut in September. This easier policy outlook is further reflected in ZAR FRA pricing, with the 3x6 contract nearing in on 8 points.
• Local focus this week falls on June CPI data, due for release tomorrow morning. Consensus looks for a downtick in headline inflation to +5.1% Y/Y from +5.2% prior, with core inflation seen unchanged from the previous month at +4.6% Y/Y. As a reminder that the SARB aims to anchor both at the +4.5% Y/Y mid-point of the target range.