Introduction to the South African Rand
The South African rand has been performing exceptionally well this year, despite the country’s economy facing substantial risks. The USD/ZAR exchange rate has been trading at its lowest level since November last year, at 17.30. This represents a plunge of over 13% from its highest level this year, making it one of the top gainers in the emerging markets.
Why the South African Rand is Soaring
The South African rand has jumped in the past few months, partly due to the ongoing interest rate differentials between the United States and South Africa. The Federal Reserve slashed interest rates by 0.25% in the last monetary policy meeting and hinted that it will deliver more cuts later this year. On the other hand, the South African Reserve Bank (SARB) decided to leave interest rates unchanged at 7%, as inflation remains near the lower side of the 3% and 6% range.
Interest Rate Differentials
The spread between the Fed and SARB interest rates has continued to widen, creating a good carry trade opportunity. This is where investors borrow from low-interest-rate countries to invest in higher-rate countries. As a result, the South African rand has become more attractive to investors, causing its value to rise.
Gold Prices and the Rand
Another notable catalyst for the South African rand is the ongoing gold price rally. Gold has jumped by over 40% this year and is now trading at its highest level on record. The performance of gold is crucial for the South African economy, as the country produces vast amounts of gold. Although gold mining production has dropped recently, it still plays an important role in the economy.
US Dollar Weakness
The USD/ZAR exchange rate has also plunged due to the ongoing US dollar weakness. The dollar index has dropped from $110 in January to $96 today, and technicals suggest that it has more downside to go in the coming months. This performance has happened as investors dump the US dollar due to various policies, including isolationist policies like tariffs.
Technical Analysis of USD/ZAR
The daily timeframe chart shows that the USD/ZAR exchange rate has plunged in the past few months, moving from the year-to-date high of 19.9280 in April to 17.25 today. It recently formed a slanted head and shoulders pattern, which is a common bearish continuation pattern in technical analysis. The pair remains below the 50-day and 100-day Exponential Moving Averages.
Key Support Levels
The USD/ZAR pair has moved to a key support level that was the lowest level in November last year. Therefore, the pair may continue falling as sellers target the next key support level at 17, the lowest swing in October last year.
Conclusion
In conclusion, the South African rand has been performing well this year, despite the country’s economy facing risks. The interest rate differentials between the US and South Africa, the gold price rally, and the US dollar weakness have all contributed to the rand’s rise. As the USD/ZAR exchange rate continues to plunge, it is likely that the rand will remain strong in the coming months. However, it is essential to keep an eye on the technical analysis and key support levels to predict future movements in the exchange rate.
