South African Rand Price Forecast: USD/ZAR Downside Correction on the Horizon?

RAND ANALYSIS

• Rand opens lower as dollar remains bid.
• Technical analysis points to possible USD/ZAR pullback.

USD/ZAR FUNDAMENTAL BACKDROP

The South African rand has slumped into negative territory year-to-date against the U.S. dollar (see graphic below) after the greenback soars on the back of rising inflationary pressures and an aggressive Fed eral Reserve.

Source: Thompson Reuters

COVID-19 based restrictions in China have subsequently dampened commodity demand, hurting commodity currencies across the globe. The ZAR is particularly susceptible due to the strong Chinese ties within the South African landscape. This being said, recent easing of COVID-19 cases in Shanghai have brought some short-term relief however much is required from the Chinese ‘zero-tolerance policy’ to build up economic growth and manufacturing forecasts to prop up the rand.

The avenue I favor for short-term rand strength comes from the maturity in dollar strength, where I expect markets to take their foot off the dollar pedal. I still favor the dollar in the medium/long-term against the rand but should resume after a temporary pullback.

TECHNICAL ANALYSIS

USD/ZAR DAILY CHART

Chart prepared by Warren Venketas, IG

The daily USD/ZAR chart supports my remedial argument for a pullback with the Relative Strength Index (RSI) exhibiting bearish divergence (yellow). Divergence refers to a contradictory move in the RSI (declining bullish momentum) against price action and vice versa. Traditionally, bearish divergence leads to lower prices however, there is uncertainty around timing which requires sound risk management technique. There is still room for upside towards the 16.3547 (38.2% Fibonacci) but I foresee a pullback to the 16.0000 psychological support zone.

Significant deviation from the EMA and 200-day SMA respectively add further sustenance to the pullback viewpoint.

Resistance levels:

• 15.3547 – 38.2% Fibonacci level

Support levels:

• 16.0000

Contact and follow Warren on Twitter: @WVenketas