The South African Rand reaches a significant low at R19.52 to the Dollar.
South African Rand
The Rand rolls into the beginning of the second to last week of May under some severe pressure from the Dollar as it reaches an all-time low of R19.52 to one $1, levels last reached in April 2020.
Factors driving this pressure on the Rand can mostly be linked to dollar dynamics when one considers the overall backdrop of the recent rally on the DXY driven by strong economic data in the wake of high interest rates. However, the nuance to note here is that there are several underlying factors that have negatively affected the performance of the Rand of late, chief amongst which are:
- The increased anxiety caused by the domestic power crisis, which has led to record levels of intermittent power cuts, has dampened investor sentiment, and this amid concerns that it could get worse in coming months could result in a contraction in GDP.
- The accusations propagated by the US ambassador to South Africa that the country allowed the shipment of weapons to Russia propelled the already pressured currency to move lower.
- The post-covid demand cycle has gradually come to an end, and with this, the “commodities boom” is one of the casualties, as some key export commodities from South Africa have significantly decreased in price, leading to decreased Tax revenues from mining companies and GDP growth.
- The recent, but not new, greylisting of South Africa by the Financial Action Task Force (FATF) is adding to the sour investment sentiment towards the country and its currency.
- The miniscule interest rate differential between South Africa versus the perceived “safer” advanced economies is making South African financial assets significantly less attractive than their counterparts and this is having a direct effect on the demand for the local currency.
These combined factors have culminated in a perfect storm and added more implied risk to the local bonds, which have had to be increased to offset the potential risks incurred by investors. And this is another reflection confirming the overall decline in investor sentiment.
Technical Analysis (W1)In terms of market structure, the price of the ZAR to the Dollar has been trading in a range between R13.08-R19.50 since early 2018. Current price action is now trading at the high of the range and has approached this point of interest where potential selling pressure could enter the market. Signs of this selling pressure are beginning to potentially show in the form of an ascending channel reversal pattern. Confirmation of bearish momentum will be signalled by a break below the R17.62 level. The short term view, however, is for price to potentially rally towards the R20 mark before signs of weakening enter the fray.
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Financial Market Analyst
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