In a quick update to Wednesday’s USD/ZAR piece (below), the SARB concluded its bimonthly monetary policy meeting yesterday. In a 5-2 decision, the central bank chose to keep interest rates unchanged at 5.5%, weighing the risks of higher inflation and a slowing domestic economy as roughly balanced. As a reminder, inflation rose to 6.1% in April, above the bank’s 3-6% target band, but economic growth is slowing amidst an ongoing strike in the country’s critical mining sector.
In terms of the future outlook, Governor Gill Marcus did reiterate that the committee “interest rates will have to be normalized [raised] in due course.” From a fundamental perspective, the recent strength in the rand since Q1 has effectively tightened monetary policy in the Rainbow Nation already by making South African exports more expensive and reducing import prices. Indeed, Marcus explicitly stated that the recent uptick in inflationary pressure was due to “the lagged effects of the exchange rate depreciation [in 2013] rather than evidence of strong domestic demand pressures.” That said, further rand strength may start to weigh on economic growth, so the SARB will face another tough decision heading into its next meeting July 15-17.
From a technical perspective, the USD/ZAR has fallen since the decision. Rates carved out a clear Dark Cloud Cover*candlestick formation off bearish channel resistance on Wednesday, and the unit has continued to fall from there. At this point, the downtrend off the late January highs remains intact, and bears may look to target the 2014 low at 10.27 next week. As long as prices stay below this week’s high, lower prices are favored in USD/ZAR.
*A Dark Cloud Cover is formed when one candle opens near the top of the previous candle's range, but sellers step in and push rates down to close in the lower half of the previous candle's range. It suggests a potential trend reversal.
USD/ZAR Bearish Channel in Jeopardy as SARB Faces Difficult Decision
Updated - May 21, 2014 8:30:00 AM By Matt Weller
Two weeks ago, we discussed the results of South Africa’s first “Born-Free” election and the longer-term impact of the victorious ANC’s policies (see below). Traders were apparently enthused by the result, pushing the USD/ZAR down to a new 2014 low around 10.27 last week, though rates have since recovered bounced back modestly. Now, rand traders are turning their eyes toward tomorrow’s South African Reserve Bank (SARB) meeting.
Central bank meetings always hold risk for forex traders, and as we noted in our EM Rundown report on Monday, the mixed outlook for the SARB meeting suggests we should see at least some volatility, regardless of what the bank decides. Most analysts anticipate no change to the bank’s current 5.5% interest rate, though some favor a hike. Earlier today, the minority position received a small boost with the release of inflation data for April. The YoY CPI inflation rate ticked up to 6.1% from 6.0% previously, slightly higher than expectations. That said, we still anticipate the SARB will remain on hold tomorrow given the slow economic growth and risks from the ongoing platinum workers’ strike.
Technical View: USD/ZAR
Looking to the chart, the USD/ZAR continues to grind lower within the bearish channel off its early January high. Just yesterday, rates ticked up to test that level, but the pair is inching back lower today, suggesting that sellers are still defending this key area of dynamic resistance. Meanwhile, the RSI indicator continues to find resistance ahead of the 60 level, consistent with an overall downtrend.
However, the technical evidence is not unanimously bearish. For one, the pair is trading back above the 61.8% Fibonacci retracement of the Oct. 2013 – Jan. 2014 rally after last week’s brief foray below this level. The failure to maintain the breakdown may indicate that the bears are losing control of the market. At the same time, the RSI formed a bullish divergence, with a lower low in price but an identical low in the indicator. Bullish divergences are often seen at major bottoms in the market, though bulls would still like to see a break above 60 before getting to aggressive.
If we do see a bullish breakout from the channel and the 50-day MA, USD/ZAR bulls may look to target previous resistance at the 10.65 level once again, possibly followed by the highs at 10.95. Meanwhile, if the pair continues its bearish trend (especially if the SARB chooses to cut interest rates tomorrow), a move back down to at least last week’s lows near 10.27 is probable, and in the fullness of time, we may see USD/ZAR continue all the way down to the 78.6% Fibonacci retracement at 10.07.
USD/ZAR: Election Day Doldrums
Updated - May 7, 2014 1:55:00 PM By Matt Weller
As we go to press, polling for South Africa’s fifth National Democratic is winding down, and USD/ZAR traders are no more enthused than the election’s eponymous South African “Born-Frees.” In addition to being the first national vote since national icon Nelson Mandela passed away last year, the election is notable because it comes 20 years after the fall of apartheid, meaning that it’s the first election that children who were “born free” are of legal voting age (18). Unfortunately, just one-third of these young voters are registered to vote, and they appear to be broadly disillusioned with the political system as a whole.
With no major shake-up expected from the influx of young voters, the ruling African National Congress (ANC) is likely to maintain its majority for the fifth consecutive national election. Pre-election polls suggest that the party will secure roughly 64% of the vote (which would be down from 66% in 2009), with the challenging Democratic Alliance expected to draw about 24% of the votes (vs. 17% in 2009).
The results will be announced within seven days, but assuming there are no surprises, we do not expect any major shifts in policy. One upshot of another ANC win is that the party may be emboldened to negotiate with the powerful trade unions on labor market reforms. We’ve already seen the negative impact lingering labor strikes can have on the South African economy, so traders may want to keep a close eye on labor relations over the next few months.
The other major policy development is the appointment of the next South African Reserve Bank (SARB) Governor. Current Governess Gill Marcus’ five-year term ends in November, and it’s unclear whether she will be reappointed to the position; obviously, the outlook of the country’s most powerful economist will have a big impact on the rand trades heading into next year.
Speaking of the rand, USD/ZAR traders have been about has excited about the election as the “Born Frees.” The USD/ZAR has inched lower in quiet trade today, but more broadly, the pair remains in a bearish channel off the late January high. Meanwhile, the MACD indicator is about to cross back below its signal line, confirming the bearish momentum in price itself.
Strong support is likely to emerge on dip toward converging support at the 200-day MA and 61.8% Fibonacci retracement near 10.35, whereas resistance is probable at the top of the bearish channel near at week’s high or at the confluence of the 50-day MA and previous-support-turned-resistance around 10.65. Overall, the technicals continue to paint a bearish picture as long as the USD/ZAR remains below 10.65.
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