USD/ZAR in reversal from road block on chartsStrength of recovery hints of a tentative bottomWhile USD softens as seasonal headwinds loom

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The Rand notched up a hat-trick of gains over the Dollar, Pound and other major currencies by the mid-week interval following a sharp reversal from last Friday’s 2021 lows, while indicating the multi-month sell-off in the South African currency may now have run its course.

South Africa’s Rand had three turbulent weeks of losses in tow when it was quoted a touch beneath 16.37 against the Dollar at the opening of the week although by Wednesday gravity had gotten the better of the USD/ZAR exchange rate, which has since been pulled back below the 16.00 handle.

The Rand had almost fully recovered last week’s losses to the Dollar by Wednesday, with knock-on implications for other South African exchange rates including the Pound-to-Rand rate, which has more than reversed the prior week’s rally to new 2021 highs.

“The rand is still at risk however and will remain highly volatile. Non-farm payrolls data out on Friday and a strong number will boost market expectations of quicker QE tapering,” warns Annabel Bishop, chief economist at Investec, writing in a note to clients.

“The US dollar has seen marked strength, and this would be set to persist on a quicker US QE taper. While the rand typically sees substantial strength over the turn of the year, this is being impeded this year by the first phase of the normalisation of US monetary policy,” Bishop also said.

Above: Pound-to-Rand exchange rate shown at daily intervals alongside USD/ZAR.

GBP/ZAR reference rates at publication:

Spot: 20.01High street bank rates (indicative): 20.28-20.43Payment specialist rates (indicative): 20.83-20.91Find out about specialist rates, hereSet up an exchange rate alert, hereBook your ideal rate, hereWhile Rand has proven highly susceptible to the frequent bouts of U.S. Dollar strength and occasional episodes of global market risk aversion seen during recent weeks, the South African unit’s strong recovery from last Friday’s lows could have enduring significance.

November’s peak in USD/ZAR coincided with the 50% Fibonacci retracement of the Rand’s recovery from March 2020’s crisis lows and there’s more than just technical reasons for why the large and decisive reversal from that level could bring at least a temporary end to the Rand’s multi-month sell-off.

“A break opens up a potential move towards 17.0,” warns Kenneth Broux, a strategist at Societe Generale, referring to USD/ZAR’s 50% Fibonacci retracement level at 16.37/16.38.

Although the Rand itself was sold heavily late last week as a result of western government’s hasty, if not hysterical responses to the latest mutated edition of the coronavirus, the USD/ZAR exchange rate had also been lifted sharply by almost relentless strength in the U.S. Dollar.

While some countries’ hasty and hopeless restrictions on travel to and from South Africa still remain as an additional burden for the country’s economy, the Dollar’s strength has waned notably this week and the U.S. currency is now entering a period that is typically characterised by seasonal weakness.

“Seasonal trends for the USD tend to turn more negative in December; market volatility might be the sort of cover markets need to lighten up on (rates and dollar) positioning now and reassess prospects in January,” notes Shaun Osborne, chief FX strategist at Scotiabank, in a research note.

The Dollar has advanced on most counterparts for much of the five months since June when the Federal Reserve first signalled that it would soon begin to slowly but surely curtail is quantitative easing stimulus programme, and although the December month could offer other currencies respite from the burdens created by this policy shift; there would likely remain a risk of the Dollar’s strength renewing in the new year.

That could be especially likely after Chairman Jerome Powell suggested in Congress this week that the Fed could soon elect to accelerate the winding down of its quantitative easing programme for reasons relating to inflation risks, although for the time being at least USD/ZAR has been road blocked on the charts and this has given the South African currency breathing space.

Above: USD/ZAR shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating likely areas of technical resistance.