South African Rand a Sell at MUFG and Bank of America

  • USD/ZAR a sell at MUFG
  • EUR/ZAR a sell at BofA
  • This implies a rising GBP/ZAR

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The South African Rand and other emerging market currencies face increasing headwinds amidst rising global bond yields, prompting two major investment banks to announce new sell recommendations on the currency.

"We expect the ZAR to weaken further in response to rising U.S. yields and a stronger USD," says Derek Halpenny Head of Research for Global Markets EMEA & International Securities at MUFG.

MUFG say the Dollar is best placed to advance against the Rand in light of the fundamental headwinds facing the currency which contrast to ongoing support for the Dollar which has regained its dominance since it bottomed out in late July.

But losses could be seen on other crosses as MUFG's call comes amidst a breakdown in the Rand's technical setup against the Euro, leading strategists at Bank of America to recommend buying EUR/ZAR as a consolidation phase comes to an end.

"Possible wave 3 of (5) higher starting soon, which is bullish," says Paul Ciana, a Technical Strategist at Bank of America.

As an emerging market currency, the Rand is typically exposed to any rise in U.S. bond yields as this signals an increasing cost to global borrowing, which is a natural headwind to growth.

MUFG says last week's release of the consensus-beating U.S. labour market report for September will reinforce upward pressure on U.S. yields and the USD by encouraging speculation over further Fed hikes.

"We are recommending a new long USD/ZAR trade idea," says Halpenny.

"The resilience of the US labour market supports the higher rates for longer policy messages delivered by the Fed. A further sharp sell-off in the US bond market should prove more disruptive for financial market conditions. A further pick-up in financial market volatility and retrenchment from risk by global investors will weigh more heavily on higher-yielding EM currencies such as the ZAR," explains Halpenny.

MUFG also finds the Rand remains sensitive to commodity prices, which have fallen back to year-to-date lows.

"Rising US yields will increase the risk of global growth slowing more ahead at a time when growth in China is already weak," says Halpenny.

Looking at domestic considerations, MUFG reckons the ZAR could also be undermined by domestic factors ahead of the release of the mid-term budget on 1st November.

Preceding the budget is the National Treasury's August 31 warning of an "exceptionally large" drop in tax revenue of ZAR22 billion for the first five months of the year.

MUFG targets a rise in USD/ZAR to 20.30.

Turning to BofA's call, Ciana says he went long on the Euro to Rand exchange rate on October 2nd at 20.15.

His analysis of the charts (see above) shows the uptrend is supported by a rising 200-day Simple Moving Average and trend line at 19.85 / 19.65.

"Possible wave 3 of (5) higher starting soon, which is bullish. MACD turning up to confirm price support holds and a rally coming. This setup implies a retest of YTD highs or new highs," explains Ciana.

However, a move below 19.36 invalidates the wave count.

"Ideally trend line holds as support (19.65). EURZAR supported, ending consolidation phase to rally Trend line and 200d SMA supporting spot. Wave 3 of (5) higher may follow," he adds.

A rising USD/ZAR and EUR/ZAR implies a GBP/ZAR exchange rate rise back to the 2023 highs.