Executive Summary

·        Global markets remain cautious amid uncertainties regarding US trade policies and also around how US monetary policy may play out over the next 12 months. The Fed is expected to hike the Fed funds rate by 25bps this week, although this is fully priced in.

·        Locally, the positive momentum seen in local markets, especially in the rand since late December 2017, is starting to reflect in the underlying economic data. Specifically, the BER Business Confidence rose to 45 from 34, moving closer to the neutral 50-point mark. This is still well below the pre-2009 highs, but nevertheless, this is positive for the private sector investment outlook (which tends to lag confidence by about two quarters). The robustness that we are seeing in the underlying data is also spilling over into substantially lower implied volatility in the FX market.

·        Local markets, however, could be dominated by Moody’s rating review of South Africa, due on Friday 23 March 2018. We expect Moody’s to keep South Africa’s local and foreign rating at Baa3 (negative outlook), ie the country would still be considered ‘investment grade’. While the bond market seems to reflect this outcome already, the currency may well find some short-term support on the back of this news as short rand-hedge positions unwind.

·        Furthermore, we expect the headline CPI print for February 2018 (due for release on 20 March 2018) to come in at 4.1% yoy, down from 4.4% yoy in January. Although 4.1% yoy is likely to be the low print for the year, largely due to the VAT increase starting in April, inflationary pressures remain benign and local markets should read a lower CPI print as a positive development (see Tax hikes and a read-through to monetary policy of 2 March 2018).

·        As a result, and as pointed out last week, we would not be surprised to see the rand rally closer to R11.75 on the back of a ratings reprieve.

·        Our six-month and 12-month target range for the USDZAR remains unchanged at R12.40 and R13.00 respectively. We remain largely in line with the Bloomberg consensus view on a six-month view, but we are more bearish on the rand on a 12-month view. Short-term, keep an eye on support at R11.70, and resistance at R12.00 (see our latest technical strategy note Strategy Note: FX and Bonds of 13 March 2018 for a more detailed technical view on the currency).