ZAR Strength May Soon Dissipate: Q2 Top Trading Opportunities

BULLISH USD/ZAR, EUR/ZAR– RAND STRENGTH MAY SOON DISSIPATE

Since mid-2020 the South African Rand has ridden the wave of “risk-on” sentiment similar to many Emerging Market (EM) currencies (see chart below). The country’s long-term structural challenges continue to occupy news headlines, but the Rand’s status as an EM currency has managed to shield it against some of this negativity.

ZAR APPRECIATION IN LINE WITH EMS DESPITE BALLOONING DEFICIT

ZAR, EM, MSCI

Chart prepared by Warren Venketas, Source: Refinitiv

With Europe and the United States driving large cash injections into their economies, the Rand has diverged from the weakening Euro and U.S. Dollar. After clawing back losses from the initial lockdown phase, the Rand appears to be somewhat over-extended against both currencies. With markets starting to digest the U.S. stimulus package as well as Europe’s PEPP program, it may be time for these two major currencies to begin to recover against the ZAR.

Furthermore, the swelling budget deficit (see chart above) will soon be exposed via the local currency which is most likely going to be to its detriment. With interest rates remaining flat for the time being and inflation falling short of the South African Reserve Banks (SARB) target of 3% - 6%, this may open up an additional possibility of Rand weakness for the quarter ahead.

USD/ZAR WEEKLY CHART

ZAR, USDZAR, USD/ZAR

Chart prepared by Warren Venketas, IG Charts

The USD/ZAR weekly chart has been consolidating since late December, forming a rectangle pattern shown in yellow above. This has the potential for a breakout should a weekly candle close outside of the rectangle’s barrier. The Relative Strength Index (RSI) is still below the midpoint level, but this downside momentum has been slowing and will likely surpass the midpoint while prices push towards topside resistance around the 15.4285 level. This outlook supports the fundamental backdrop of overall Rand weakness for Q2.

1 2
View single page >> |

Disclosure: See the full disclosure for DailyFX here.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.