USD/ZAR Update: South African Rand Facing Downside Risk Ahead of Inflation Data and SARB Rate Decision

USD/ZAR FUNDAMENTAL OUTLOOK:

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USD/ZAR price action over the past month has faced a host of challenges with fears around US sanctions, the African Growth and Opportunity Act (AGOA) deal, worsening SA data and of course the gift that keeps on giving, Loadshedding.

The initial selloff in USDZAR which was sparked by escalated loadshedding received a shot in the arm in the aftermath of comments by Reuben Brigety, the US Ambassador to South Africa. Brigety told a media briefing on Thursday May 11 that the US believed weapons and ammunition had been loaded on to a Russian freighter that docked at a naval base on the outskirts of Cape Town in December. The market reaction in the aftermath of the comments saw the Rand lose further ground to the greenback closing the day around the 19.3400 mark (2019 and ATH). Since we have seen a rejection of the 19.5000 mark and a retracement to the psychological 19.0000 handle before rallying higher.

All of this comes following a 50bps hike by the South African Reserve Bank (SARB) which will hit consumers hard once more as borrowing costs rise. Any gains the Reserve Bank had of further appreciation for the ZAR once again wiped out by a potential political blunder. Where does the ZAR go to from here as the 20.0000 psychological mark rests on the horizon?

AGOA DEAL AND SA DATA

A lot of the fear since the allegations by the US Ambassador has rested around potential sanctions on South Africa as well as the trade relationship between SA and the US. The AGOA deal has been a constant thread of discussion among local and international economists and political commentators. In all fairness the talks around AGOA started long before the accusations by the US Ambassador, with many economists locally feeling South Africa have failed to capitalize on the AGOA deal. The failure by Government to fully utilize the benefits of AGOA across all sectors remains a mystery and yet in 2021 SA exported some $2.7bn to the US which met the eligibility criteria for AGOA. In total SA exports to the US accounted for $15.7bn during 2021 with certain metals and minerals not eligible under AGOA. The recent Accusations by the US Ambassador have raised concerns that the US may seek to exclude SA from AGOA when the current agreement ends in 2025 which would put SA in the company of former states who have faced suspension like Cameroon, Guinea and Mali. The fear is that such a suspension will further dent an economy already struggling while adding to the growing number of unemployed citizens should such a suspension occur.

On the South African front, the economy continues to underperform estimates while inflation and borrowing costs tick higher. Retail sales data for March released this morning provided further signs of the struggle facing the everyday South African as retail sales declined by -0.7% in March following a contraction of -0.3% in February. Next week brings both the South African Inflation data and the Reserve Bank Meeting with markets largely expecting a 25bps hike. Looking toward the interest rate meeting and the recent developments, ruling out another surprising 50bps hike would be a mistake as Governor Kganyago will no doubt be looking to keep USDZAR below the 20.0000 handle. Whether or not he will have a chance given how quick the pair rallies remains to be seen.

Source: STATS SA

US DEBT CEILING

Part of the dollar’s recent resurgence has been the deadlock and back and forth on the US debt ceiling between Republicans and Democrats. The ensuing indecision has given markets a bit of jitters with the dollar a short-term beneficiary as safe haven demand returns. House Rep. Kevin McCarthy said that while progress was made yesterday during talks with President Biden a deal this week seems unlikely. Given the comments could the continued indecision push USDZAR over the 20.0000 mark?

On the calendar front we don’t have a lot in the way of high impact data this week from the US or SA, suggesting that any moves on the dollar index is likely to have an even bigger bearing on USDZAR. This is what the calendar has in store over the next 7 trading days (Times posted are GMT+1):

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TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at the daily chart below we can see near term support resting around the psychological 19.0000 level. Having kept a close watch on USDZAR for the better part of 7 years one realization I have come to is that USD/ZAR has an affinity for whole numbers/psychological numbers. The pair is currently trapped between the 19.0000 support level and the all-time high around 19.5125 with 20.0000 on the horizon, at which point a correction may be in order.

Alternatively, a push lower from here will require a daily candle close below the 19.0000 which would see support at 18.7000 and 18.5000 come into focus. Any further gains for the ZAR and the 50-day MA around the 18.3400 mark would be worth keeping an eye on.

USD/ZAR Daily Chart, May 17, 2023

Source: TradingView, Prepared by Zain Vawda

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda