Top 2023 Trade: Short USD/ZAR - Rand Places Hopes on China Re-Opening and Political Stability

2023 has much in store for the South African rand after an erratic 2022. Following a strong start to the year, the ZAR ended up weaker against the U.S. dollar however, on a comparative scale, the Emerging Market (EM) currency managed to hold its own – see graphic below.

YEAR-TO-DATE GLOBAL FX RATES AGAINST THE USD FOR 2022

Source: Reuters

Going into the first quarter the rand has traditionally exhibited flat returns against the USD over this period. The table below shows over the last six years, the rand has garnered support in January thereafter giving up gains in February and March.

Source: Table prepared by Warren Venketas, Refinitiv

Looking at the broader commodity complex, much hinges on the China re-open after an extended cycle of COVID restrictions. South Africa is no exception being a nation heavily reliant on Chinese demand, and any positivity around a fully operational China will likely bolster the ZAR. Coal exports throughout 2022 have been a ray of sunshine for the South African economy due to many European countries revisiting their coal-fired power stations as a hedge against the haunting energy crises in Europe.

From a local standpoint, South Africa continues to exhibit political weakness with President Cyril Ramaphosa’s impeachment, worsening rolling blackouts (loadshedding) and declining business and consumer sentiment. One positive for South Africa has been its management around monetary policy after the South African Reserve Bank (SARB) stayed true to the directives given by Governor Lesetja Kganyago by maintaining a hawkish stance. While many South African’s felt the pain of higher repayments, the currency managed to resist further decline. The Federal Reserve had much to do with the actions of global central banks as their intent for 2022 was to quell inflationary pressures using aggressive monetary policy. The graph below outlines the SARB’s mirroring of Fed interest rate hikes thus maintaining the carry trade appeal for the ZAR. In 2023, the SARB like most EM central banks are approaching peak rates while the Fed is expected to peak in May of 2023. These actions are largely priced into markets already but any upside inflation surprise in the U.S. could hurt the rand going forward and vice versa.

Source: Chart prepared by Warren Venketas, Refinitiv

In summary, the current headwinds facing the rand are significantly outweighing any support factors which leaves a lot of room for substantial favourable price movement for the rand in response to constructive fundamental news.

TECHNICAL ANALYSIS

USD/ZAR DAILY CHART

Chart prepared by Warren Venketas, IG

The daily USD/ZAR chart above shows current uncertainty in the markets as reflected by the RSI hovering around the midpoint 50 level which favours neither bullish nor bearish momentum. Price action remains firmly above the 200-day SMA (blue) suggesting a marginal upside preference although mean reversion is being exhibited. While there is scope for further dollar appreciation, by the end od Q1 the rand could be back down around the 1700.00 psychological support handle.

Key resistance levels:

-18.0000

-Trendline resistance (black)

-17.5000

Key support levels:

-17.0000

-16.7107

-200-day SMA

Contact and follow Warren on Twitter @Wvenketas