What's going on with the Rand?

What’s moving the rand?

Local catalysts

The rand has reflected a domino effect of consequence stemming from ailing State-Owned Enterprise (SOE) Eskom.

2019 has borne witness to government’s R69bn provision for the power utility over three years, as well as another R58bn allocation over the next two years. The increased ‘bailout’ funding has been met with disdain by ratings agencies, with Fitch lowering their outlook for South Africa’s credit rating from stable to negative, while Moody’s Investor Relations has warned that the move by Treasury is credit negative for the country.

Moody’s, who are the last of the ratings agencies to have South Africa’s local currency credit at investment grade, are scheduled to release their next review in November 2019, shortly after the Mid-Term Budget Speech in October 2019. Markets have been pricing in an increased (although not yet certain) probability of a sub investment rating to be announced at the meeting.

International catalysts

Escalating trade tensions between the US and China has been and remains the dominant theme in markets. Risk aversion stemming from the ongoing tit for tat battle between the world’s two largest economies has seen the 2yr and 10yr US bond yields invert temporarily, a suggestion of an economic recession to follow. Emerging market currencies (including the ZAR) have as a result been under increased pressure over the last few months.

In recent news, China has announced that it will retaliate with a further 10% in tariffs on $75bn of US goods, while US president Donald Trump has said he will impose another 5% in tariffs on $550bn of Chinese imports.

At this stage there appears to be a clear market cycle whereby the US and China agree to engage in trade discussions, which lifts market sentiment, before trade talks fail and are concluded with further tariff threats or implementation, which then invokes fear back into the market place.

Unfortunately, after a year of trade talks, there appears to be little progress from the on off nature of these discussions, while the cost of goods for all continue to increase.

Further to the trade war narrative, the US Federal Reserve Bank has moved to a less dovish stance since cutting lending rates by 0.25%, saying that this is not the beginning of a prolonged loosening cycle. Fed Chair Jerome Powel has also been labelled a ‘traitor’ by Donald Trump, who is looking for further easing from the central bank.

How the rand has performed

The above chart shows the rand’s year to date (31 December 2018 to 26 August 2019) performance against major currencies. While Brexit uncertainty and a weak Eurozone economy has limited the domestic currency’s losses against the British pound and the Euro, depreciation against the USD has been more pronounced.

The above chart shows BRICS (Brazil, Russia, India, China and South Africa) currencies performances year to date against the US dollar. While most currencies have been weaker over the period, the rand has underperformed its BRICS counterparts on the domestic catalysts highlighted earlier.

USD/ZAR – Technical trading view

The sharp uptrend in the USD/ZAR which commenced late July 2019 has ended for the time being, as the currency moves into a short-term trading range between the R15.05/$ (support) and R15.50/$ (resistance) levels. The trading range is highlighted with the grey rectangle on the above daily chart of the USD/ZAR.

The sideways consolidation offers traders two short term opportunities namely, a range trade or a breakout trade.

Range trading the USD/ZAR

Range traders might be inclined to keep a long bias to trades on the USD/ZAR while it is in consolidation, in lieu of the fact that the trend which preceded its formation was up. A reversal off support would be considered a long entry opportunity with a move towards R15.50/$ expected. Traders might look to a close below the reversal low as a stop loss consideration, or alternatively use a stop loss for the trade roughly 20c from entry (to attain an approximate 1:2 risk relative to reward expectancy).

USD/ZAR Breakout trade

The USD/ZAR price consolidation highlighted between the R15.05/$ and R15.50/$ levels on our previous chart is circled red on the weekly chart above as well. The two candles circled red are known as ‘Dojis’ and show a point of directional indecision on the currency pair at current levels.

Traders waiting for a new directional momentum to signal for the USD/ZAR currency pair might prefer to wait for a breakout scenario.

An upside breakout would be considered should the price close above the R15.50/$ resistance level of the short-term trading range. In this scenario, R16/$ would be the initial upside resistance target highlighted on the chart above. A 20c to 25c stop loss distance from entry would provide traders with roughly a 1:2 risk to reward expectation.

A downside breakout would be considered should the price close below the R15.05/$ support level of the short-term trading range. In this scenario R14.60/$ would be the initial downside support target and is also highlighted on the chart above. A 20c to 25c stop loss distance above the short entry level would provide traders with roughly a 1:2 risk to reward expectation.