"USDZAR and USDCNH charts still show rising channels with support at 17.25 and 7.00, respectively. If spot rates fall below theselines,then it would be technically clearer that a more significant USD downtrend can occur," - BofA Global Research
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The Rand pushed USD/ZAR below 17.25 to reach its highest level since early September this week in a turn of events that creates scope for further gains in the days and weeks ahead while also warning of a possible trend reversal being in the pipeline for the U.S. Dollar exchange rates more generally.
South Africa's Rand outperformed most other G20 currencies during the week to Tuesday while also rising strongly against the U.S. and Canadian Dollars from the G10 contingent following further widespread market speculation about a possible moderation of the Federal Reserve (Fed) interest rate stance.
This is after U.S. inflation rates fell in annualised terms for the month of October, leading financial markets to abandon last Thursday their earlier assumption that the Fed could be likely to target a higher peak for interest rates than was penciled into September's Federal Open Market Committee forecasts.
"Technical breakdowns in USDZAR and USDCNH would go a long way in favor of a USD top pattern and a larger decline in 2023 (vs many volatile sideways swings in the DXY). We don't see this yet," says Paul Ciana, chief technical strategist at BofA Global Research.
"USDZAR and USDCNH charts still show rising channels with support at 17.25 and 7.00, respectively. If spot rates fall below theselines,then it would be technically clearer that a more significant USD downtrend can occur," Ciana wrote in a recent review of the U.S. Dollar charts.
Dollar exchange rates had already been falling to the benefit of other currencies like the Rand ahead of last Thursday's inflation report but the sell-off has gathered pace and persisted since then, leading USD/ZAR to fall below the trendline at 17.25 that was flagged by BofA's Ciana.
USD/ZAR's break below 17.25 this Tuesday is indicative of a top having been formed in the wake of a 2022 uptrend that would be at risk of a further partial reversal if the U.S. Dollar remains under pressure in the days and weeks ahead, although it's far from certain that this will be the case.
"The risk-on rally that came after the improved inflation data from the US was beneficial to the ZAR. This week, the primary focus will be on the market’s reaction to the ZAR’s strength against most of the major currencies," says Sebastien Steyn, an FX risk and hedging specialist at Sable International.
"The South African retail sales figures for September will be released on Wednesday. The market is anticipating a contraction of 2.1% (MoM), which is not positive for the growth prospects of the country," Steyn wrote in Monday look at the week ahead.
October's decline for the overall U.S. inflation rate continued a months-long trend reflecting falls in energy prices but the ebb in the core inflation rate merely reversed September's increase and still leaves this more important measure of non-energy and food inflation plateuing at multiples of the Fed's 2% target.
The plateu in the core inflation rate means there is a danger that financial markets may have overestimated the significance of last week's inflation report when it comes to the Federal Reserve interest rate outlook, which would place a question mark over the sustainability of the recovery in the Rand.
"The rand has continued to run stronger this week, reaching R17.14/USD yesterday, as expectations consolidate that the US will slow its rate hike cycle to 50bp in December, with recent comments from a key Fed member helping the US dollar weaken," says Annabel Bishop, chief economist at Investec.
"Markets have reacted positively to the caution, which has stimulated some small risk taking, driving the domestic currency towards R17.00/USD with the possibility that it could pierce R17.00/USD in the next few weeks on additional wind back in US FOMC hawkishness," Bishop said on Tuesday.
The Fed said on November 02 that its interest rate would be likely to rise in smaller increments during the months ahead than it has done recently but also warned that the eventual peak in borrowing costs is likely to be higher than was assumed in September and there is still time for U.S. data to ensure that this turns out to be the case.
For the Dollar, Rand and other currencies a lot will depend on whether the October decline in inflation extends further during the months ahead as well as on the extent to which other U.S. and global economic data deteriorates under the weight of high energy prices, elevated inflation and rising interest rates.