Strategy
Today the People’s Bank of China in a surprise move decided to cut its key policy rate – the 1-year lending rate – by 25bp to 5.6%. This is clearly positive for risky assets and for Emerging Markets and commodity currencies in general.
The cut in our view signals a more dovish PBoC with more willingness to support Chinese growth. This should be positive for global commodity prices and hence should help commodity and Emerging Market currency.
The PBoC’s action is likely from a technical perspective to strengthen further the ‘rebound’ in the rand we have seen in recent weeks.
As a consequence we recommend to sell USD/ZAR on the Chinese monetary easing.
Fundamentals
Given South Africa’s large reliance on commodity export, monetary easing from the PBoC clearly supports South African exports and in that regard it should be noted that China is South Africa’s main trading partner.
Furthermore, as South Africa is running a fairly large current account deficit, easier global monetary conditions will help ease the funding of this current account deficit and hence help the rand.
With fairly high South African interest rates, Chinese monetary easing makes the rand even more attractive from a carry perspective.
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