Rand’s Basic Background Despite continuous local economic and political troubles, the rand has remained defiant throughout Q2. This is unsurprising given that the ZAR has been mostly driven by external global causes throughout the COVID-19 epidemic. The rand’s and its Emerging Market (EM) currency rivals’ developments have been influenced by risk sentiment. Other emerging market currencies have also performed well, although the rand has been the best performer versus the dollar for the majority of 2021, with the Brazilian Real taking over recently. The reason for this outperformance isn’t because of the rand’s strength, but rather because of the relative poorer conditions in peer countries. For example, India’s COVID-19 situation is deteriorating, while Russia and Turkey’s geopolitical worries are putting pressure on their currencies. Covid-19 vs. USD/ZAR Financial Crisis Warren Venketas of Refinitiv created the graph. Even if longer-term interest rate hikes were brought forward following the Q2 FOMC meeting in late June, the carry trade aspect remains in place in Q3 as the US Federal Reserve maintains low interest rates. A fascinating parallel between the financial crisis of 2007/8 and the current COVID-19 pandemic (see chart above) reveals a similar tendency of notable rand rise against the dollar following rate reduction (purple). Fed Funds Rate vs. South African Repo Rate (2007-2013) (Financial Crisis) Fed Funds Rate vs. SA Repo Rate: From 2019 to Now (Covid-19 pandemic) Between the high in October 2008 and the bottom in May 2011, the USD/ZAR plummeted by nearly 45 percent. While current USD/ZAR prices represent a 30 percent drop from April 2020 highs. Is this to say that the situation is comparable? In a nutshell, the answer is no. In this instance, I do not expect USD/ZAR will decrease another 15% because the interest rate differential between the South African repo rate and the US Fed Funds rate is rather considerable between the two periods (in terms of rates). During the post-financial-crisis period, the spread was 7%, reducing to 4.875 percent in late 2012, and now stands at 3.375 percent (Q2 2021). This lessens the impact of the carry trade, which could explain the disparity between the two eras because a bigger differential normally means more support for the currency tied to the higher interest rate (rand). Percentage Change in the Past Weakness in the USD/ZAR Indicates Weakness in the Rand Warren Venketas of Refinitiv created the graph. The graph above depicts the 1Q percentage change from the financial crisis period, which demonstrates similar economic conditions to the current situation, with significant rand gains followed by a consolidating period somewhat biased toward dollar upside. As we approach the end of Q3, the rand could see minor gains against the dollar before a bullish USD/ZAR view emerges. Cases of COVID-19 in South Africa are on the rise. The COVID-19 component could not be ignored in this Q3 trading projection, as South Africa is currently experiencing a third wave that may be more severe and have a higher case volume than previous waves. This could lead to more resistance for rand bulls, confirming the USD/ZAR pair’s bullish bias. Analysis of the Technical Weekly USD/ZAR Chart The weekly USD/ZAR chart above shows the rand’s remarkable durability throughout 2021. Throughout this time, price action has built a solid trendline resistance zone (black), which has held fast despite repeated attempts to break through. Bulls are currently attempting to break through resistance, thus market players will be searching for a confirmation close above this resistance zone, as well as the 14.5000 psychological milestone. The 61.8 percent Fibonacci retracement from the February 2018 lows to the April 2020 high confirms this level. Price action could stay between the 14.0000 support and 14.5000 key levels at the start of Q3, after which probable taper rhetoric from the US, as well as the Jackson Hole symposium in late August, may trigger further dollar strength, promoting upside toward 15.0000. Since September 2020, the RSI oscillator has indicated bearish momentum; nevertheless, a rise above the 50 mark on the index could stimulate long USD/ZAR bets./n
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