The US dollar is now approaching towards the 2020 trading low against the South African rand currency, after being trapped in an extended period of price consolidation prior to this week’s Federal Open Market Committee rate decision.
Buyers are currently nowhere to be seen as the greenback comes back under pressure after the FOMC meeting and the South African rand currency remains one of the best performing emerging market currencies this year.
HSBC bank has recently put out an investment note stating why the South African Rand is currently so strong on the foreign exchange market, and indeed why it looks set for further gains ahead this year.
The bank start by saying that the strong terms of trade and external balancing is one contributing factor to the rand’s ongoing strength. In terms of trade, exports are exceeding imports, which is always an economic positive.
Secondly, HSBC state that low inflationary pressure and prudent monetary policy from the South African Reserve Bank are also bullish. Contained inflation in emerging market economies is indeed a sign of stability.
And thirdly, sensitivity to positive global risk-on sentiment is helping the South African rand currency right now. This means that rising stock markets are typically bullish for the South African rand.
Fundamentals are clearly a big part of the USDZAR pair. Especially South African fundamentals, which appear to lead this pair at times, meaning that keep a close eye on the South African economy is very important for USDZAR traders.
Sentiment towards the USDZAR pair is providing a yellow flag. According to the ActivTrader Market Sentiment tool some 60 percent of traders are bullish towards the pair, despite ongoing weakness.
Typically, as long as traders remain on the wrong side of the market by 10 percent or more, then we should expect the decline to worsen. It will be interesting to watch traders’ behavior is the USDZAR dips under the 14.00 handle.
USDZAR Short-Term Technical Analysis
The four-hour time frame shows that the USDZAR pair has invalidated an inverted head and shoulders pattern, around the $14.40 level.
According to the overall size of the invalidated price pattern a $1.20 decline in the USDZAR pair should now be expected, which would place the $13.20 level as a potential bearish target. Watch out for technical selling to increase if the 2020 trading low, around the $13.90 support level, is broken.
USDZAR Medium-Term Technical Analysis
Looking at the daily and weekly time frame, a major range breakout has taken place after the USDZAR moved away from the $14.40 to $15.50 price range.
According to the overall size of the range break, a directional move of $1.10, at a minimum, is on the horizon. Typically, when we see these types of range breakout then strong trending directional moves take hold.