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This week begins with a marginally stronger Rand against the US Dollar and its major counterparts (GBP and EUR). With both South African and US interest rate announcements to come during the week, markets can expect an increase in volatility and possible price fluctuations depending on variance from estimates and unexpected announcements.
USD/ZAR Technical Analysis
( 12:09 GMT )
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USD/ZAR Daily Chart:
Chart prepared by Warren Venketas, IG
The daily USD/ZAR chart above shows price action wavering between the 16.5000 and 17.0000 horizontal levels respectively since the end of August. The larger range can be seen from June where the 38.2% and 23.6% Fibonacci holds as respective support and resistance zones. Price may be heading toward support as the Moving Average (MA) nears a possible bearish crossover (100-day crosses below 200-day in blue) as mentioned in my previous article last week.
Fundamental factors affecting the pair may provide the catalyst to form this bearish crossover and push prices toward the 16.5000 support level and potentially the 16.3444 38.2% Fibonacci zone. The FOMC decision out of the US may have a systemic effect on the SARB if their rate decision diverges from current expectations. If consensus outcomes are seen whereby the SARB keeps rates on hold, this may lead to this short-term bullish continuation.
A rate cut by the SARB will likely cause a depreciation in the Rand and could see ZAR bears target the 17.0000 resistance level. A lot can change from now until Thursday, particularly in the global economic environment so keeping a close watch on any influencing factors could give more accuracy to outcome probabilities.
( 16:09 GMT )
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Enduring Global Risk On Sentiment Supportive Of South African Rand
Emerging Market (EM) currencies have shown mixed responses to global market conditions with the ZAR being one of the standout performers. Although a weaker USD has promoted ZAR strength, the undervalued statistic of the Rand since earlier in the year has resulted in significant strength. Most emerging market currencies offer an attractive carry relative to more developed pairs which may inspire further ZAR strength going forward.
The South African Rand has benefited from the persistence in near term risk-seeking investor appetite coupled with rising yields on South African benchmark government bonds. Over the last month, the R2023 and R2030 government bonds have risen 0.03% and 0.06% respectively (at the time of writing). This increasing yield may encourage Rand bulls and risk-seeking investors.
Tough Decision For SARB Monetary Policy Committee (MPC)
With the next South African Reserve Bank (SARB) interest rate decision scheduled for 13:00GMT on Thursday (see the calendar below), markets will keep a keen eye on proceedings as arguments for both ‘hold’ and ‘cut’ have validity. The last meeting resulted in a 25bps rate cut to an annual rate of 3.5%.
Arguments for and against a rate cut
Finance Minister Tito Mboweni has made a statement that he expects South Africa’s GDP growth outlook for 2020 to contract more than estimates.
South Africa’s CPI is within the SARB’s target range between 3% and 6%. Although at the bottom end, rising inflation is still positive and may favor a hold on interest rates.
A reduction in tax revenue has put added strain on which impacts GDP. This will supplement governments woes going forward in an attempt to generate revenue.
The consensus amongst economists support a hold on rates and forecast a rate increase in over a year.
Dwindling investor confidence prompted by power utility Eskom and corruption could support a rate cut.
No major policy changes expected from upcoming Federal Reserve (FED) interest rate meeting .
The R500 billion stimulus package announced by President Cyril Ramaphosa has yet to show its efficacy as there have been many administrative hurdles encountered during implementation.
Ease in lockdown restrictions imminent which could foster additional economic growth prospects.
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USD/ZAR: Key Points To Consider Going Forward
The focus for this week will be firmly on Central Banks and their respective interest rate decisions. USD/ZAR will surely be affected by volatility around each event which may cause large price swings. Ensuring sound risk management technique will be essential when trading around these events.
- 16.5000 psychological level
- Central Bank announcements
- Risk management parameters
— Written by Warren Venketas for DailyFX.com
Contact and follow Warren on Twitter: @WVenketas