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Chart of the day: ZARJPY

ZARJPY declined 3.59% on Thursday, the highest daily percentage change since November 2016.

As spreading coronavirus concern takes the market risk-off, investors are unwinding risk ahead of the weekend and safe havens, like JPY, are rallying.

The large rate differential between South Africa (6.25%) and Japan (-0.1%) hasn’t supported the Rand since volatility picked up and carry trades started to unwind.

Fundamentally, South Africa has suffered two consecutive contractions: in 4Q19 (-1.4% QoQ); and 3Q19 (-0.8%). Annual GDP growth slowed to 0.2% in 2019, the lowest level since the GFC. This is particularly bad news for Africa’s second-largest economy (after Nigeria).

Add to poor growth expectations a low inflation rate (due to slumping oil prices) and the coronavirus economic fallout, the pressure is mounting on the South African Reserve Bank to cut rates at its next meeting. Meanwhile, the flight to safety has strengthened the JPY despite the Bank of Japan’s potential rate cut on 19 March.

ZARJPY chart

ZARJPY found support at the 6.765 level on Monday, its lowest since August and has since continued to test the level. The pair is capped by the bearish 10-day EMA, with the RSI settling just above the oversold area. A breakout of this long-term support should take the pair to 6.315, a level last seen in June 2016, should the virus impact get any worse.

However, since the RSI hasn’t dropped as sharply as price action, we can expect a consolidation from here. The inverted hammer forming on the weekly chart might even give the bulls some confidence. The resistance level can be seen at 7.01, the confluence of the 23.6% retracement level and 10-day EMA.

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