Market movers ahead: Rate decision in South Africa and inflation across the CEE region

Despite the South African economy continuing to recover, there are some signs that the recovery is losing steam and global economic slowdown poses further downside risks to the South African economy. At the same time, inflation continues to ease and is now well within the South African central bank target of 3-6%. Furthermore, the strength of the rand continues to be a thorn in the side of South African officials, as it undermines recovery. All in all, we expect the South African central bank to cut the key policy rate by 50 basis points to 6% next week.

In August, inflationary pressure is likely to ease in all Baltic economies. However, the highest decline on a monthly basis is expected in Latvia and Lithuania. Estonian price levels are expected to remain the highest among the Baltic countries. In August we expect to see a stronger impact of seasonal sales (vegetables, clothing, footwear are characterised by a relatively strong seasonality factor) and decline in global oil prices. Future developments in Baltic inflation will largely depend on external factors. There is a substantial risk that due to unfavourable weather conditions the rise food prices will accelerate. However, domestic demand remains weak in the region, which would prevent inflation from more significant upside. In Estonia we observe a slightly faster increase in
prices – this may be due to the introduction of the euro. As already indicated many countries experience a short-term jump in inflation during the euro changeover.

Fixed Income Outlook: Focus on inflation

However, overall we do not expect any major surprises from next week’s inflation data and as such we would not expect any major market reaction. Global and regional inflationary pressures appear to be easing and our Monetary Policy Tracker (MPT) – which among other things tracks inflationary trends – seems to indicate that there are downside risks to inflation in most EMEA countries covered by the MPT. This, in our view, continues to signal downside risk on yields at the short end of the curve in most EMEA countries – with Hungary the most notable exception.

FX Outlook: The trend is not the friend of ZAR and TRY

The two lowest scoring currencies in our EMEA FX Scorecard this week are the South African rand and the Turkish lira. Among the key reasons for this is that both currencies appear rather overvalued on a fundamental basis – and have been for some time. Furthermore, both currencies are quite sensitive to the deterioration of the global economic and financial climate we have seen recently and the uptrend in EUR/USD is something that normally weighs on both currencies, as they typically do badly when the dollar is losing momentum.

Scorecard based trade of the week: Buy ILS/ZAR

For the third week in a row the highest scoring currency in our EMEA FX Scorecard is the Israeli shekel, while the lowest scoring currency is the South African rand. Therefore we continue to recommend buying ILS/ZAR based on our EMEA FX Scorecard.