Traders Urged To Focus On Process Over Predictions After Inflation And SARB Rate Decision

By Francois Du Plessis Chief Executive Officer for South Africa of CFI Financial Group South Africa

“South African traders received two significant pieces of economic information within 24 hours in July. Stats SA reported that annual consumer inflation had risen to 5% in June, followed the next day by the South African Reserve Bank’s decision to keep the policy rate unchanged at 7%.

“Now that the announcements have passed, the useful question is not whether a trader correctly predicted the outcome. It is whether their process helped them interpret the information, manage volatility and avoid making rushed decisions.

“I see newer traders place too much importance on getting the headline call right. They decide what the rand should do, build a position around that view and then discover that the market is responding to a different part of the announcement.

“A disciplined trader understands that the result is only one part of the event. What the market expected, how traders were already positioned and what policymakers communicated about the future can matter just as much.

What did the July announcements tell us?

“June inflation increased to 5% from 4.5% in May, reaching its highest level in two years. Transport was the largest contributor to both the annual and monthly inflation increases, driven mainly by higher fuel prices.

“The following day, the SARB kept the policy rate at 7%. However, the decision was not unanimous. Four Monetary Policy Committee members supported the hold, while two preferred an increase of 25 basis points.

“That voting split matters because it reveals more than the unchanged rate alone. It shows that two policymakers believed a further 25-basis-point increase was appropriate, while the committee as a whole continued to see upside risks to inflation.

“The SARB also highlighted stronger underlying price pressures, elevated services inflation and rising inflation expectations. It indicated that inflation could remain above 4% until early next year and described the risks to the outlook as being tilted to the upside.

“For traders, the lesson is clear: an unchanged rate does not necessarily mean an unchanged outlook.

The market reacts to expectations, not only outcomes

“Markets rarely respond only to the number in the headline. They respond to the difference between what was expected and what was delivered.

“A rate hold may have little immediate impact if it was already reflected in prices. But the voting split, inflation forecast, risk assessment or Governor’s comments can still change expectations about what the SARB may do next.

“The same applies to inflation. A higher reading does not automatically produce one predictable move in the rand, equities or commodities. Traders also need to consider whether the increase was expected, whether the pressure was concentrated in fuel or spreading more widely, and how global markets were positioned at the time.

“Dollar strength, commodity prices, global risk appetite and geopolitical developments can all influence the response. This is why there is no automatic trade attached to an economic release.

Review the process, not only the result

“After an event, traders often judge themselves according to whether they made or lost money. That is understandable, but it does not always reveal whether the decision itself was sound.

“A poorly planned trade can still make money. A carefully considered trade can still produce a loss. The more useful review is whether the trader understood the risk, followed the plan and responded appropriately when the market behaved differently from what was expected.

“Traders should ask themselves what they believed the market had already priced in, which scenarios they considered and whether their position size matched the uncertainty around the event.

“They should also examine whether they had clear entry and exit levels, whether they knew what would invalidate the trade idea and whether they allowed for wider spreads and slippage during the announcement.

“If those decisions were made only once prices started moving, the trader was reacting rather than executing a plan.

The first move does not always tell the full story

“Prices can move sharply in the seconds after an inflation release or interest-rate announcement as automated systems and short-term traders react to the headline.

“The market may then change direction as participants study the detail. In July, traders had to consider not only the 7% policy rate, but also the divided vote, the stronger inflation pressures and the SARB’s cautious outlook.

“Chasing the initial move can therefore be costly. By the time a trader enters, much of the first adjustment may already have occurred. The market may then reverse as liquidity returns and participants reconsider what the announcement means for future policy.

“Waiting does not remove risk, but it gives traders time to assess whether the move is holding and whether the original trade idea still makes sense.

“There is also no rule requiring someone to trade every announcement. Choosing not to participate when the price action is unclear can be one of the most disciplined decisions a trader makes.

Use August to prepare for the next cycle

“The July announcements are over, but the economic cycle continues. Stats SA is scheduled to publish July inflation on 19 August, while the SARB’s next interest-rate announcement is due on 23 September.

“Rather than waiting for those dates to arrive, traders can use the period now to review what happened in July and improve their process.

“At CFI, we encourage traders to practise event-driven scenarios in a demo environment before committing real capital. The CFI Academy, webinars and market commentary can also help people understand the relationship between economic data, central-bank decisions and price movements.

“A trading journal is particularly useful after a major event. Writing down what you expected, why you took or avoided a position, how you managed risk and what happened afterwards turns one announcement into a lesson that can improve future decisions.

“The advantage does not belong to the trader who guesses one MPC outcome correctly. It belongs to the trader who can prepare for several possible outcomes, manage exposure and remain willing to do nothing when the risk is unclear.

“That process will still matter when the next inflation figure is released, when the MPC meets again and long after the July announcement has faded from the headlines.”