Long USD/ZAR: top trade opportunities
Long USD/ZAR: aggressive Fed marking the end of the road for resilient rand?
After a strong Q1 in 2022 for the ZAR (which has been the trend over the past few years), the rand could be in for a turnaround. Before delving into potential Q2 influences it is important to remind ourselves of the rand’s recent support:
- War in Ukraine driving supply concerns
- Higher commodity prices (in particular rand-linked exports such as iron ore, gold, platinum and coal)
- China’s relative resistance to geopolitical tensions in Europe – primary trading partner with South Africa
- Subdued Fed.
These four major factors will remain key influences going into Q2 with some likely changes which may skew forecasts in favour of the dollar. The first and most important in my opinion is the Fed’s pivot to a more hawkish stance. Fed Chair Jerome Powell has opened up the possibility for 50bps hikes going forward while money markets are currently pricing in roughly 250bps of Fed tightening for 2022.
Whether the US economy can handle tightening of this severity is another question altogether but what we can deduce is that the Fed and SARB’s rate hike path will differ drastically. In addition, it can be said with certainty that the South African economy cannot cope with such drastic tightening measures.
With current expectations, we are likely to see the Fed funds target rate (red) steepen far quicker than the South African repo rate. In addition, USD/ZAR tends to trend higher in Q2 (historically speaking) and this may well unfold in Q2 2022.
China’s bearing on the rand is significant but with the implementation of strict lockdowns due to the spread of COVID-19, demand from China may decline leaving the rand open to further downside – limiting commodity gains.
USD/ZAR weekly chart
The weekly USD/ZAR chart shows price action trading below the key 15.0000 psychological support level for the first time since late 2021, slumping to yearly lows around the 14.5030 38.2% Fibonacci support level –taken from February 2018 lows to April 2020 highs. While there is still room for short-term rand strength I anticipate a rebound from the dollar opening up room to push higher towards the 15.0000 handle once more.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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