USD/ZAR: South African rand rally may be short-lived, warns analyst
The South African rand has been on a strong rally, emerging as one of the best-performing currencies in the emerging markets this year. The USD/ZAR exchange rate has dropped to its lowest point since August 2023, down over 8% from its highest point this year.
This rally has been fueled by improved business and consumer confidence in South Africa. The political stability following the coalition government between the Africa National Congress (ANC) and the business-friendly Democratic Alliance has boosted confidence and is expected to attract foreign capital inflows in the coming months. Business confidence and consumer confidence have both shown a positive trend, with retail sales experiencing the longest streak of growth since 2022.
In addition to the confidence boost, inflation has been falling, prompting expectations of interest rate cuts by the South African Reserve Bank (SARB) this year. Money market funds and government bonds are providing higher inflation-adjusted returns, making the South African rand more attractive. The government has also taken steps to improve its financial position and address issues such as Eskom.
However, not all analysts are optimistic about the continuation of the South African rand rally. Marek Drimal of Societe Generale believes that the rally is unlikely to have further legs. The swap market also anticipates rate cuts, which may dampen the rand’s performance.
Furthermore, the USD/ZAR exchange rate has been influenced by the actions of the Federal Reserve. The possibility of a rate cut in September has put downward pressure on the USD, benefiting the rand. Economic indicators in the US, such as strong retail sales, have tempered expectations for a larger rate cut.
Technically, the USD/ZAR pair is in a strong downtrend, breaking key support levels and below the 50-day moving average. This suggests that the bearish momentum is likely to continue, with the next support level at 17.40 being the target for sellers.
Looking ahead, the upcoming Fed minutes and the Jackson Hole Summit will provide further insight into the trajectory of US monetary policy, which could impact the USD/ZAR exchange rate.