Talking Points
- The South African economy is weak but, with inflation high, no rate cut is expected near-term.
- Technically, the 14.00 level for USD/ZAR can be reached in the next few weeks.
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The South African Rand has little going for it at the moment and USD/ZAR could well reach the 14.00 level over the next few weeks.
Data released Tuesday showed the country’s manufacturing output fell 0.8% year/year in May, a smaller fall than expected and better than the revised 4.2% year/year drop in April. Yet there was almost no pickup in the Rand in response, emphasizing how poor sentiment is currently towards the currency.
South Africa has just suffered two quarters of economic contraction, putting it in recession by one definition, and two of the big three credit-rating agencies have downgraded its debt to junk status. Unemployment is at a 13-year high of 27.7% and consumer-price inflation accelerated to 5.4% in May from 5.3% in April, putting the South African Reserve Bank in a quandary.
While the SARB is expected to cut interest rates before the end of this year, either in September or more likely November, its monetary policy committee will likely sit on its hands at its next meeting on July 18-20.
Meanwhile, the USD/ZAR chart points to further strength in the US Dollar against the Rand.
Chart: USD/ZAR Daily Timeframe (2017 to Date)
As the chart shows, the pair has been in a rising channel for the past month and that climb has further to go, with the May highs close to 13.70 the first target, followed by the April highs at around 13.95. Once the 14.00 level is breached, even more strength is possible, while the support line of the rising channel, currently at 13.09, provides significant support.
Add into the mix South Africa’s turbulent political situation, with President Jacob Zuma reportedly having been asked to step down by the ruling African National Congress’s integrity commission, and it is hard to see how the Rand can rally from here.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at martin.essex@ig.com
Follow Martin on Twitter @MartinSEssex
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