By Win ThinSouth Africa's central bank kept rates steady at 6.5%, as expected. However, it is noteworthy that Governor Gill Marcus said that the Monetary Policy Committee spent "quite a bit of time discussing the South African currency, the rand. She noted that the South African Reserve Bank has no target level for the rand, but that the bank is in talks with Treasury about the exchange rate. Deputy Governor Xolile Guma noted that "prolonged misalignment" of the rand will have an adverse effect on the economy. Earlier today, President Zuma confirmed that the government is considering a recommendation made by the OECD earlier this month to weaken the rand to promote exports and job creation. With all this chatter regarding the rand, something seems to be brewing. Increased foreign exchange intervention would be the easiest choice, but we suspect that mild capital controls might be on the agenda if the dollar-rand currency pair (USD/ZAR) moves back toward 7. The 7.40 area offers mild support for USD/ZAR, but a break would target the April low around 7.20. Officials would not be happy with such a move. We do think that the case for a rate cut remains in place, with upcoming meetings scheduled for Sept. 8 and 9 and then Nov. 17 and 18. Any decisions will be data-driven, but we note that the June CPI report is due out next week and is expected to show the year-over-year rate easing to 4.5% from 4.6% in May. This would be the fifth straight month that inflation has been in the 3%-6% target range. South African Reserve Bank officials have said that price pressures are expected to ease further in the third quarter. Note that the recovery remains spotty, with the PMI dropping below 50 in June for the first time in eight months. The rand has been in the middle of the emerging-market pack so far in the third quarter, up 1.7% vs. the dollar, but we think high yields are the only thing going for it right now.
If rates come down as we expect, then the rand should lose more of its appeal.