- USD/ZAR testing key support near 17.25 on chart
- Break below places 17.06 & 16.59 into contention
- GBP/ZAR supported at 20.28, stymied near 20.70
- SARB policy & Eskom woes in focus domestically
- USD, Fed & China's pandemic policy posing risks
Above: Ceremonial arrival of President Cyril Ramaphosa at Horseguards Parade, London, following invitation for State Visit to United Kingdom by King Charles III. Image © Simon Walker, No 10 Downing Street.
The Rand has continued to test an important level of resistance against the Dollar on the charts though it has been unable to subdue a buoyant Pound Sterling and will have to navigate a multitude of risks in the days ahead.
South Africa's Rand advanced against a retreating U.S. Dollar on Tuesday while also climbing against the Chinese Renminbi and other Asia Pacific currencies such as the Korean Won and Singapore Dollar but it lagged behind most within the G10 contingent of major currencies.
USD/ZAR has continued trading close to 17.25, which has been flagged as a trend inflection point by technical strategists at BofA Global Research, in recent sessions and would potentially have scope to push lower toward 17.06 and 16.59 if the trendline around 17.25 gives way.
"Locally, the focus remains on the state of Eskom and its struggles to fulfil its most basic purpose," says Walter de Wet, a currency strategist at Nedbank.
Tuesday's price action came with parts of South Africa sitting in darkness amid a fresh bout of load shedding by state electricity monopoly Eskom, a spectre which may also be looming for parts of the Britain.
The mixed Rand performance also follows market disappointment over developments in China where coronavirus containment efforts have brought fresh disruption to parts of the economy and upset following jubilant speculation over a possible change of tac in the world's second largest economy.
This potentially explains the underperformance of Asia Pacific currencies, which would be relevant for the Rand because the South African currency is highly sensitive to movements in the Renminbi and likely as a result of the trade relationship between South Africa and China.
"The rand remains vulnerable to global risk sentiment as well, while domestically markets are tending towards a 75bp instead of a 100bp hike from the MPC this week," says Annabel Bishop, chief economist at Investec.
"The US has hiked interest rates by 100bp more than SA has, and the erosion of the interest rate differential between the two countries has weakened the rand, as has US$ strength on rising risk aversion globally. The FOMC is set to hike again this year by 50bp in December," Bishop adds.
All of this comes ahead of this Thursday's monetary policy decision in which the South African Reserve Bank (SARB) is likely to lift its cash rate from 6.25% to 7% if the economist consensus is anything to go by, which would be a sixth increase from a record low of 3.5% back in November 2021.
Above: GBP/ZAR shown at daily intervals with Fibonacci retracements of August decline indicating possible areas of technical resistance. Selected moving-averages denote possible areas of technical support. Click image for closer inspection.
Thursday's SARB decision will follow Wednesday's release of minutes from the November Federal Open Market Committee (FOMC) meeting of the Federal Reserve in which U.S. policymakers agreed to raise the Fed Funds rate by three quarters of a percentage point for a fourth consecutive occasion.
"Tomorrow’s minutes will be important to watch, but recent Fedspeak has undoubtedly added a layer of caution to the dovish pivot enthusiasm, which could mean investors may also be more reluctant to overinterpret dovish signals from the minutes," says Francesco Pesole, an FX strategist at ING.
"We continue to see the dollar at risk of new brief bearish waves this week, but we note that the environment has now turned more benign for the greenback, and this may be laying the groundwork for a re-appreciation into year-end, which is our baseline scenario," he adds.
Fed Chairman Jerome Powell told reporters after November's decision that U.S. data had, until then, argued in favour of a higher end point or peak for interest rates than the 4.75% suggested in September's FOMC forecasts.
The market is likely to look on Wednesday for clues about how widely held this view was on the FOMC while the Dollar and other currencies including the Rand could be sensitive whatever the suggestion in relation to this particular point.
"We suspect the risks are tilted towards a realized level above 500bps. We are shifting to a more neutral view on the USD and suspect ranges to hold for now," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.