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29 Jan 2016
End of SARB's hiking cycle is nigh - TDS
FXStreet (Guatemala) - Analysts at TD Securities explained that their central scenario is seeing the end of the SARB's hiking cycle is nigh.
Key Quotes:
"Yesterday the SARB hiked its policy rate by 50 bps to 6.75%. This was in line with the consensus, although we had expected that the SARB would hike by only 25 bps.
There are signs that we might be nearing the end of this hiking cycle. The voting was close, with three MPC members voting for 50 bps, two for 25 bps, and one voting for no change. Furthermore, the statement saw the risk to the inflation forecasts as being evenly balanced. Prior MPC statements recently have seen the risks as being to the upside.
We think that the weakness of the South African economy will keep the rand on a weakening trend over most of this year, although the size of the expected move will be small compared to what we have seen over the past 12 months or so. We expect USDZAR to rise to 18.40 by Q3 of this year before starting to move back down slowly.
The fact that we expect further, albeit more modest, rand weakness will mean that the SARB will move rates a bit higher, but in our central scenario we are only expecting 50 bps more, probably in 25 bps increments. It is hard to be precise about the timing of these hikes, but we think there is a good chance that the SARB remains on hold at the March meeting if, as we expect might be the case, realised inflation numbers are not as bad as the SARB’s forecasts.
South African rates have rallied strongly since the SARB rate hike: 2y swaps are down 17 bps since the day before the rate meeting. However, the FRA curve is pricing in about 105 bps of hikes by the end of this year; more that the 50 bps that we expect. So we think there is still value in receiving short-end rates, although, given the rally we have had today and yesterday, it is probably wise to wait for a possible retracement before establishing positions."
Key Quotes:
"Yesterday the SARB hiked its policy rate by 50 bps to 6.75%. This was in line with the consensus, although we had expected that the SARB would hike by only 25 bps.
There are signs that we might be nearing the end of this hiking cycle. The voting was close, with three MPC members voting for 50 bps, two for 25 bps, and one voting for no change. Furthermore, the statement saw the risk to the inflation forecasts as being evenly balanced. Prior MPC statements recently have seen the risks as being to the upside.
We think that the weakness of the South African economy will keep the rand on a weakening trend over most of this year, although the size of the expected move will be small compared to what we have seen over the past 12 months or so. We expect USDZAR to rise to 18.40 by Q3 of this year before starting to move back down slowly.
The fact that we expect further, albeit more modest, rand weakness will mean that the SARB will move rates a bit higher, but in our central scenario we are only expecting 50 bps more, probably in 25 bps increments. It is hard to be precise about the timing of these hikes, but we think there is a good chance that the SARB remains on hold at the March meeting if, as we expect might be the case, realised inflation numbers are not as bad as the SARB’s forecasts.
South African rates have rallied strongly since the SARB rate hike: 2y swaps are down 17 bps since the day before the rate meeting. However, the FRA curve is pricing in about 105 bps of hikes by the end of this year; more that the 50 bps that we expect. So we think there is still value in receiving short-end rates, although, given the rally we have had today and yesterday, it is probably wise to wait for a possible retracement before establishing positions."