Trading ZAR in the wake of the COVID-19 pandemic
As panic has spread across financial markets in the wake of the Covid-19 pandemic, we assess the recent performance of the rand against its developed and emerging market peers.
As panic has spread across financial markets in the wake of the Covid-19 pandemic, we assess the recent performance of the rand against its developed and emerging market peers. Ahead of the South African Reserve Banks Monetary Policy Committee (MPC) meeting and rates announcement, we also take a look at how the rand is setting up technically from a longer-term perspective.
Rand under pressure
The rand has depreciated rapidly in 2020 in lieu of the risk off market environment the coronavirus has enabled. The graph below shows how weakness has been most pronounced against currencies acting as safe havens, most notably the Japanese Yen and the Swiss Franc.
The performance of the ZAR has been more in line with that of the Australian dollar, which reflects the slowing global growth narrative in a commodity driven economy.
Emerging market currencies also under pressure
The graph below highlights the performance of BRICS (Brazil, Russia, India, China and South Africa) currencies against the US dollar. The rand while having weakened significantly, has managed to outperform its peers, the Brazilian Real and the Russian Ruble. The Russian Ruble would reflect the further economic impact from the dramatic fall in oil prices. The Chinese Yuan while being a significant outperformer amongst the BRICS currencies, is artificially pegged by Chinese officials to enable price stability.
The USD/ZAR (monthly chart)
A monthly chart of the USD/ZAR shows the currency pair to be breaking above historical resistance at R16.45/$. The breakout suggests continued gains with high at R18/$ the next upside resistance target.
While the USD/ZAR is starting to look overbought at current levels, it is less relevant than the upside breakout and long-term uptrend in place. We do however think that the current move higher (dollar strength / rand weakness) could be the short-term capitulation before the USD/ZAR starts to pullback once again. A pullback would see R16.45/$ and R15.90/$ as initial support targets.
The EUR/ZAR (Monthly chart)
The EUR/ZAR has broken out of a triangle shaped consolidation to continue the uptrend which preceded its formation. The first upside resistance target of R18.60/EUR is now being tested, a break of which would consider R19.65/$ as a further upside target.
The GBP/ZAR (monthly chart)
The GBP/ZAR is testing resistance at the R20.50/GBP level. A break of this level would consider R22.80/GBP as a further upside target. The uptrend is however less convincing with no material breakout having occurred (as is the case with the EUR/ZAR and USD/ZAR charts). There is an overbought signal at resistance currently as well. Failure to break the R20.50 level would suggest a pullback towards the R18.20/GBP level as a more probable move thereafter.
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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