The USD/ZAR has been going sideways against the Rand for a couple of weeks now, and now that we head into the Federal Reserve meeting on Wednesday, it does make a certain amount of sense that we are winding up for some type of momentum play. Keep in mind that the South African Rand is highly levered to commodities, so therefore we do have that aspect in play as well.
With the Federal Reserve tightening, it’s like a wrecking ball to emerging market economies. After all, almost everything in international trade is based in US dollars, and when you see your local currency get eviscerated, that makes everything up much worse. The South African Rand has been hanging around the 18 level for a while now, and I do think that it is probably only a matter of time before break above there and go much higher. When we break above the 18.55 level, then I think we got the next move underway.
Pair Likely to Drop
- At this point, pullbacks will continue to look at the 18 handle as important, right along with the 50-Day EMA sitting just below there.
- In fact, the 50-Day EMA has acted a bit like an uptrend line, so therefore I will treat it as such.
- If we break down below there, then we probably have a deeper correction, perhaps down to the 16 Rand level just waiting to happen.
However, you must pay attention to the US dollar in general. If it’s falling everywhere, then it’s possible that we see this pair drop. However, if we see US dollar strength in general, then it’s likely that we will see this prayer rally as the South African Rand is not exactly a heavyweight in the global markets. Although used as a gateway for Africa, the Rand suffers the same way most emerging market currencies do when there is a lot of inflation, and there most certainly is going to continue to be inflationary pressures everywhere. Currently, inflation in South Africa is almost 8%, so that of course will work against the economy as well. Add to that the fact that treasuries pay a yield now, it continues to favor the greenback over the longer-term, and I think we will continue to see this trend play out.
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