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Have We Seen The Best Of The Rand?

Posted on: 10 December 2018 , by: Darren Sinden , category: Market Review

Contrarian: USDZAR has completed a key retracement, are we due for a countertrend rally?

2018 has been quite a year for the South African rand. It’s had a range of 11.50 and 15.70 against the US dollar while the country experienced dramatic changes in its political landscape. This included the turmoil in early August initially caused by an abrupt collapse in the Turkish lira, which then spread to many other Emerging Market currencies. The rand underwent a renaissance during November, rising by more than +8.0%, its best performance in the 11th month of the year since November 1988 according to Bloomberg. That move was unusual since in seven out of the last ten years the rand has weakened in November. The South African currency also had a buoyant start in December, boosted by hopes that a China-US trade accord will extend beyond the current 90-day moratorium on tariffs.

A Trading Nation

Trade matters to South Africa and its economy which relies heavily on the exports of commodities and metal ores. More than 30% of its total exports were made up of these types of goods in 2016, according to data from the Harvard Atlas of Economic Complexity. Despite having significant reserves of coal, South Africa is reliant on imports of oil and petroleum products to meet its energy needs.

External Sensitivities

This combination means that the rand is sensitive to the outlook on global trade, commodity prices and the performance of the US dollar. The rand is also something of risk barometer in Emerging Market currencies. Gains in the latter part of November were partly fueled by a +0.25% rate rise from the South African Reserve Bank, which was the first time that the bank had raised rates since 2016. The central bank's monetary policy committee was evenly split on the decision. However, the bank moved rates higher to keep a lid on inflationary pressures in the local economy. Recent rand gains against the US dollar will also help to keep those pressures in check, particularly in the case of imported fuel and food. 

Given recent rand strength, you might be forgiven for thinking that all is well in the country but that is far from the case. The markets were prepared to give new President, Cyril Ramaphosa, and his administration the benefit of the doubt. However, plans announced over the summer to explore the seizure and redistribution of land without compensating the current owners is a serious concern and calls into question the rule of law in the country.  

USDZAR Daily

The Technical Picture

From a technical standpoint, dollar-rand has recently completed a 100% Fibonacci retracement from the late August highs around 15.70 and found support around the 0.% line, from where it has rallied in recent days. Given the completion of that retracement, we could be due for a countertrend rally. This is because the market euphoria that followed the G20 meeting and trade war truce seems to be rapidly evaporating, with a greater focus now on concerns about global growth during 2019. Research published by JP Morgan last week highlighted the sensitivity of the rand to movements in the trade-weighted dollar or dollar index.

This data shows the rand is more sensitive to dollar strength than it is to dollar weakness. The median performance of the rand in periods of dollar strength is a loss of just under ten percent. Conversely, the average gain for the rand during periods of dollar weakness is a little over five percent. We can see just how the rand compares to its peers during bouts of dollar strength in the chart below.

EM Currencies - Median FX Performance During Periods of USD Strength

Source JP Morgan Research 

Dollar index tested back above 97 and recently touched a high of 97.538 on the 28th of November, before backing off once more. However, if the market senses the outlook on global growth and trade is not going to benefit from the G20 truce,  we should see the US dollar strengthen again. At the same time, commodity and trade-related currencies are likely to become a lot less attractive to investors. Under those circumstances, I think we can look for rallies in USDZAR to the 23.6% retracement line circa 14.026, moving above the downtrend line as we do so before testing higher to the 38.2% line around 14.3618 thereafter.

 

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