(24 October 2019 ) DAILY MARKET BRIEF 1:ZAR uncertainty should stay

The impressive depreciation of the South African rand observed in the past three months following the July monetary policy meeting amid Moody’s credit downgrade risk due to a growing fiscal deficit risk and trade war fears that triggered a consequent CNY decline, have made the ZAR one of the worst performing EM currencies. Although investors would consider the inflation decline from September to support the case for a cut in the South African Reserve Bank Repo Rate, we would temper the view in light of the upcoming rating decision on 1 November 2019. Furthermore, the latest bailout approved by the South African Parliament for the indebted state-owned power utility company Eskom could well trigger Moody’s credit downgrade to junk, which would ultimately increase interest costs for the government and cause sizable money outflows from the country. It is therefore appropriate to consider a further decrease in ZAR following the country’s interim fiscal report due on 30 October 2019.