USD/ZAR: South African rand outlook as SARB governor hints at rate hikes

The USD/ZAR pair was little changed on July 1 as traders reacted to hawkish remarks by South African Reserve Bank (SARB) Governor Lesetja Kganyago, who spoke at the European Central Bank (ECB) forum in Portugal. The pair was trading at 16.40, a few pips below last month's high of 16.67.

SARB may hike interest rates in July

The USD/ZAR pair wavered even after Kganyago, the head of South Africa’s central bank, hinted that the bank may decide to hike interest rates later this month. 

If this happens, it will hike rates to 7.25% and the prime lending rate to 10.75%, the highest level in months. He pointed to the fact that South Africa’s inflation has remained at an elevated level since the start of the war.

The most recent data showed that the headline consumer inflation jumped to 4.5% in May from this year’s low of 3%. It has continued moving further away from the bank’s target of 3%.

Still, the ongoing developments may give the bank room to pause since inflation is set to moderate. Crude oil prices have pulled back, with Brent hovering at $70, while West Texas Intermediate (WTI) is trading at $67. Indeed, petrol prices have dropped by about R2 per litre. 

Other commodity prices may continue to decline now that the US-Iran conflict has entered a ceasefire. If the ceasefire holds, commodity prices are likely to remain under pressure, which could provide some support to the South African economy.

However, a key challenge for South Africa is that prices of several of its major export commodities have also continued to weaken. For example, gold, platinum, and palladium prices have fallen sharply over the past few weeks.

US NFP data and Kevin Warsh statement

The next important catalyst for the USD/ZAR pair will be the upcoming statement by Kevin Warsh, the new Federal Reserve Chairman. He will deliver his statement at the ECB conference in Portugal.

Warsh will talk about the US economy and provide hints on what to expect from the Fed later this year. A Polymarket poll estimates that odds of a rate hike have jumped to 53%. This aligns with what Fed officials noted in the last monetary policy meeting. 9 members signaled that they will be comfortable hiking rates later this year.

USD/ZAR is still one of the most common carry trade pairs in the forex industry, thanks to the wide spread between the US and South Africa. 

The next key catalyst for the pair will be the upcoming US non-farm payrolls (NFP) report. Economists expect the data to show that the economy added over 114k jobs in June as the unemployment rate remained at 4.3%.

USD/ZAR technical analysis

USD/ZAR chart | Source: TradingView

The daily chart shows that the USD/ZAR pair has been in a downward trend in the past few months. It has formed a descending channel and is pointing downwards after retesting the upper side.

The pair has dropped below the 50-day moving average and the 50% Fibonacci Retracement level. Therefore, the path of the least resistance is downwards, potentially to the psychological level of 16.0. A move above the upper side of the channel at 16.67 will invalidate the bearish outlook.