Where to next for South Africa? Take a read below to find out more. The rand had been heading in the right direction, strengthening against the dollar all the way down from its 19 level blow off top back in April 2020. There were a couple of factors helping the rand recover its losses. 1) In a world of compressed yields, investors went searching for higher interest rates and SA offers some of the most attractive carry in the world 2) SA is a big commodities exporter and with prices surging on this front, their terms of trade improved significantly 3) Positive developments around shoring up the ailing State Owned Electricity Company, Eskom’s balance sheet as debt was reduced by about a fifth. 4) A relatively resilient and less restricted economy.
So what is the explanation behind the weakness we’re seeing now? Two things. 1) The extreme looting and disorder we’ve seen across South Africa in response to the arrest of former President Jacob Zuma is seeing a risk premium slapped back onto SA by currency traders 2) The US Central Bank (Fed) is beginning to go down the path of policy normalization. Yesterday saw a very punchy inflation print which only adds fuel to the fire in terms of expectations around tightening by the Fed.
The other problem is a very slow vaccination rollout as SA enters their 3rd wave. Vaccine centers have also had to temporarily close as a result of the widespread violence. It’s upsetting to see my place of birth getting torn apart - my hope is that this is a temporary phenomenon to be faded and order is soon restored. Although, transaction costs tend to be higher for the USDZAR, when you have an Average True Range reading of circa 2000 pips there’s plenty opportunity for traders to take advantage of the volatility. Options traders see an 81% probability that the rand will slide to 15 per dollar this quarter.
Looking at the technicals, price is sniffing around the 200-day SMA, which will be a key level for USDZAR in the coming days. A breach of this could see a fast sell-off as stops are triggered and bring 15.50 into play. Price broke out of the mini range between 14.42 and 14.12 that it had been in for almost a month. The downtrend line from the highs of March/April 2020 has also been breached. The RSI is close to overbought, but can clearly become even more overbought should conditions deteriorate.
The 21-day EMA continues to provide dynamic support to price on the upside. For a pullback I’d monitor the 14.42 former range resistance as a price target. The momentum, however, currently remains towards further weakening in the rand.