Blame for the repo rate not undergoing the expected 50 basis point cut can be put squarely at the door of food prices. The May consumer price index (CPI) at eight percent was slightly above that hoped for, but food price inflation at 12.5 percent is unacceptable.

Most agricultural futures' prices are still on their way down and while the oil price has risen, thanks to the strengthened rand our fuel price increases have not yet become onerous. Some food producers have been severely wrist slapped for anti-competitive practices, but food inflation remains stubbornly high. Why?

During its frantic climb, oil, which was blamed for higher food prices, ended May 2008 at $131 a barrel. Oil is now about $67. The rand-dollar exchange rate, which affects petrol pump prices, ended May 2008 at R7.70/. This year it ended at about R8.30/. But because of the drop in the oil price, last year we were then paying around R9.89 a litre for petrol, now we are paying 25.6 percent less at about R7.35 litre. Fuel cannot be blamed for food inflation.

Over a seven-year period, the chart shows the progress of the rand against the dollar. I've shown how the repo rate, which is partially dictated by inflation, first fell heavily, steadied for a 14 month period, rose and then fell again. To illustrate inflation I've used the Commodity Research Bureau (CRP) spot index which includes food. While it has risen since December, year-on-year it has fallen by 21 percent.

Charts predict a steady or little firmer rand, which hopefully will negate the further rise in the oil price that charts foretell. The CRP's spot and future plotting show them at the bottom of a cycle, and rising slightly in the short term.

As for the share market, it didn't like the pegged repo, but was fairly sanguine about the news.

The overall index still hangs on to its short-term bull trend and, unlike foreign markets, its near-term future plotting is slightly up. While I question this reading, as we typically shadow major markets, with our interest rates still comparatively high and Standards and Poors affirming our sovereign rating, foreign investors may eye us with approval.

The resources index has dipped this month, and some individual resources shares look off-colour. Along with the oil price, Sasol has dropped into oversold territory but is far from oversold.

If my readings of an oil price rise pans out, and if Sasol reaches an oversold level, it will be time to buy.

Also in oversold territory, Billiton and Lonmin are worth watching. Coal has dipped back but is likely to have a quick upward bounce.

AECI looks set for a slight pullback before a sharp rise. Afrox has confirmed a bull trend but its future plotting disappoints. Unusually high volumes in Hudaco attract attention as does its upward future reading.

Business Day

AFP

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