Rand Report: Decision time with risks looming
The Rand seemed to be breaking down against the dollar. The following report has more information on the performance.
The South African rand has been trading in a defined range against the dollar since last week, bouncing between a high of around R19.15 and a low of around R18.86. The British Pound to ZAR pair had similar price action, with price slightly up trending from a low of R22.78 last Tuesday to a high of R23.27 on Tuesday this week.
THE SOUTH AFRICAN RAND
The rand appears to be breaking down against the dollar, with a move above the local range high of R19.15. Whether the move is sustained likely depends on the current global pressures as well as the dollar Index (DXY) strength. A clean break in the USD/ZAR pair above R19.28 could spell trouble for the rand as it would invalidate the head and shoulders technical pattern we currently have and would likely send the pair to the psychological USD/ZAR 20 mark.
THE U.S. DOLLAR INDEX (DXY)
The DXY is currently forming a pennant above the previous resistance of around 105.5 and is currently looking strong. A break back below the support of 105.5 would be a welcome sign for the rand, at which point we can look to call a top in the USD/ZAR and GBP/ZAR pairs.
Although US Treasury yields held off from their Monday highs, there was only short-term relief in the markets and emerging-market currencies. In the macro picture, the US Treasury yields have erased the emerging-market bond risk premium, with emerging-market yields for a brief moment trading higher than US rates. This makes emerging-market bonds vulnerable to a sell off.
Next week’s Medium-Term Budget Policy is expected to highlight South Africa’s constrained exports and economic growth, as well as the poor fiscal position and subsequent fiscal risks. In conclusion, the only bull case for the rand and many other emerging market currencies is a correction in the DXY, with a clean break below the 105.5 level flashing a buy signal.
UPCOMING MARKET EVENTS
WEDNESDAY, 25 OCTOBER
- USD: Fed Chair Powell speech
THURSDAY, 26 OCTOBER
- ZAR: PPI month-on-month (September)
- EUR: ECB interest rate decision
- USD: GDP growth rate quarter-on-quarter Q3
FRIDAY, 27 OCTOBER
- USD: Personal spending month-on-month
- USD: Core PCE price index month-on-month (September)
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