The South African rand continued its strong comeback this week as investors focused on the new government in the country. The USD/ZAR exchange rate has dropped for three straight days, moving from this month’s high of 18.65 to 18.20.
South African unity government
The ZAR was one of the best-performing currencies this week after the country formed the first unity government ever. This coalition brought together the two biggest parties in the country as they set aside their long-standing differences.
Therefore, investors hope that the new government will go to work and solve the challenges the country has been going through. The biggest crisis is youth unemployment, which stands at over 50%.
It will also need to solve the energy crisis that has caused South Africa to have unreliable power for a long time. The other issues are to do with the transportation sectors, where the airline and the rail sectors have struggled for a while.
Still, the biggest challenge is that coalition governments tend to have major differences, and in some instances, achieve little. A good example of this is in Kenya, where the coalition deal between Mwai Kibaki and Raila Odinga in 2008 led to a major stagnation.
It is unclear also whether government will be able to handle the core challenges that South Africa faces.
SARB interest rates
Most importantly, the new government will likely not lead to a change in the central bank’s outlook.
Like other central banks, the South Africa Reserve Bank (SARB) hiked interest rates to deal with the post-pandemic inflation.
Unlike banks in Mexico and Brazil, SARB has opted not to cut interest rates since it believes that inflation is still sticky.
Still, analysts believe that the bank will start to cut them later this year. A report published on Friday showed that inflation expectations for the next two years dropped to 4.9% from the previous 5.2%.
The report said that people in South Africa expect that inflation will average 5.3% this year followed by 5% in 2025 and 4.9% in 2026.
These numbers will be encouraging to the central bank, which will meet later this month. Analysts expect that the bank will decide to leave interest rates unchanged in the coming meeting.
SARB has left interest rates unchanged at 8.25% for seven straight months and the governor has warned that it will not cut them until inflation falls firmly to 4.5%.
Therefore, the USD/ZAR pair has dropped as investors anticipate that the Federal Reserve will move earlier than the Fed. Most analysts believe that the Fed will cut interest rates by 0.25% in its meeting in December.
The next important data to watch will be the upcoming US inflation report, which will provide more information about rates.
USD/ZAR technical analysis
The South African rand has done well in the past few months as it jumped by almost 9% from its lowest point in 2023. This rebound happened even as the US dollar index rose to over $105.
The USD/ZAR pair has crashed below the 50-day and 25-day Exponential Moving Averages (EMA), meaning that bears are in control. Also, the pair has formed a three black crows candlestick pattern, which happens when three red candles follow each other.
The Relative Strength Index (RSI) has dropped below the neutral point of 50 while the Stochastic Oscillator has drifted downwards.
Therefore, the USD to ZAR pair will likely continue falling as sellers target the key support level at 18.10, its lowest swing in November and December last year. A drop below that point will see it drop to the year-to-date low of 17.86.
The post USD/ZAR analysis: South African rand rally explained appeared first on Invezz
