South Africa Surprises with a 50 bp Cut

South Africa's central bank surprised the market with a 50 bp rate cut that brings the key repo rate to 6.5%. A Bloomberg survey found only 2 of 24 surveyed expected a cut. While we had recognized the risk of a cut, news yesterday that Feb inflation was in line with expectations (5.7% year-over-year vs 6.2% in Jan) and still at the upper end of the central bank's 3% to 6% target band seemed to favor a stand pat stance.

The rate cut may encourage demand for South African bonds and stocks and this may lend the currency some support. We had noted earlier this week that the dollar was finding support near ZAR7.30 and the surprise cut saw the US dollar spike briefly above ZAR7.42 from around ZAR7.37 just prior. Resistance is seen near ZAR7.4250, which as it turns out corresponds roughly to the 20-day moving average. A move above there could spur a move to ZAR7.50.