Local and international factors Wilts Rand

RAND ANALYSIS

• Fed under pressure to fight inflation.
• Load shedding interruptions.
• Political instability reaffirmed by the report on the July riots.
• Weakness of raw materials linked to the rand.

BASIC CONTEXT OF THE ZAR

CARRY’S TRADE

the South African Rand slipped after holding the title of the best performing currency against the American dollars in 2022 (see graph below). The Brazilian real has since gained the upper hand, accentuating the divergence of central bank politics between the two Emerging market (EM)nations. I mentioned it in a previous analysis, but now the price action clarifies the protection against a decrease transport trade following a falcon Federal Reserve.

CURRENCY PERFORMANCE AGAINST USD DURING THE YEAR

Source: Reuters

ECONOMIC TROUBLES AND LOCAL POLITICS

The lingering problem of power cuts across the country has surfaced once again, adding to an already struggling economy trying to grow post-COVID. Household and business disruptions continue to weigh heavily on economic growth and business confidence.

Political challenges are exacerbating the problem of loss of confidence after the report on the July riots was released yesterday. The report essentially highlighted the inability of the security services to conduct themselves in a manner befitting their mandate as factional clashes within the ruling ANC party add to political instability. More details around this report will be discussed by President Cyril Ramaphosa later this week (SONA).

MERCHANDISE

Main South African export merchandise including coal, platinum, gold and iron ore are all trading lower this morning, providing additional headwind to the upside of the rand.

GEOPOLITICAL TENSIONS

Russia/Ukraine pressure is very high as many Western countries seek to defuse the situation through various methods. As this threat looms, EM currencies could be snuffed out as risk aversion could take over higher-yielding assets.

ECONOMIC CALENDAR

High-impact events this week are limited to US Thursdays inflation printout and the state of the nation address (SONA) later that day. The focus will be on US inflation, as estimates predict a notable increase in 5.9% from 5.2%. Should this materialize or beat expectations, significant dollar appreciation could threaten much of the 2022 rand gains like hawk fed bets increase.

Source: DailyFX Economic Calendar

TECHNICAL ANALYSIS

EUR/ZAR DAILY GRAPHIC

Chart prepared by Warren VenketasGI

The tide may have been turning for the rand since late November 2021. While this may be an early call, the upside potential given the fundamental backdrop is strong.

The upside momentum has just changed from bearish reflected by the Relative Strength Index (RSI) read above 50 as prices now trade mostly EMA levels.

Resistance levels:

Support Levels:

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