- The US dollar has lost over 1% against the South African Rand during the trading session on Wednesday, as we have seen a call being of interest rates.
- At this point, we are testing the bottom of a major channel, and therefore it’s worth noting that the next 24 hours could be crucial.
- At this point, we are about to also get CPI numbers in the United States, which will have a major influence on what happens next with the US dollar overall, and perhaps more importantly at this point, interest rates.
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As interest rates have been falling over the last couple of days, it makes sense that the US dollar has struggled against some of the higher-yielding currencies, with the South African Rand being in that category. If we break down below the uptrend line just underneath, that opens up the possibility of a move down to the 18.50 ZAR region. On the other hand, if we turn around and take out the 50-Day EMA, and perhaps even by extension the 19 ZAR level, then we could see this market rally. As things stand right now, it certainly sets up for a reversal, and it probably comes down to the CPI more than anything else.
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The size of the candlestick for the last couple of days does suggest that we have a lot of momentum in this market, but when you look at the longer-term chart, it certainly looks like it is a countertrend trade. South Africa is not exactly the first place people jump into in order to invest in times of concern, and quite frankly we have a lot of things to be concerned about at the moment. Yes, the interest rate differential does favor South Africa, but if we start to see a little bit of normalization of the uptrend in the yields of the 10-year note in the United States, then it makes sense that we continue what we have seen for quite some time.
While this isn’t the first place people think of when they trade inflation, I think it is very important to pay close attention to this set up as it is a bit on the perfect side at the moment.
Potential Signal: The US dollar is oversold, but we need to see some type of turnaround in order to take advantage of the trend. If we break above the 19 ZAR level, then the market could go looking to the 19.50 level. If we do go long, the 18.73 level will be my stop loss.
