The South African rand is having a great performance this year even as the country’s economy face substantial risks. The USD/ZAR exchange rate was trading at 17.30, its lowest level since November last year. It has plunged by over 13% from its highest level this year, making it one of the top gainers in the emerging markets.
Why the South African rand is soaring
The South African rand has jumped in the past few months, partly because of the ongoing interest rate differentials between the United States and South Africa.
The Federal Reserve slashed interest rates by 0.25% in the last monetary policy meeting earlier this month and hinted that it will deliver more cuts later this year. Another 50 basis point cuts will bring US rates to about 3.50%.
The South African Reserve Bank (SARB), on the other hand, decided to leave interest rates unchanged at 7% now that inflation remains near the lower side of the 3% and 6% range. Officials cited the need for the bank to observe the impact of the previous 125 basis points interest rate cuts.
Therefore, the spread between the Fed and SARB interest rates has continued to widen, creating a good carry trade opportunity, where investors borrow from low-interest-rate rates to invest in higher-rate countries.
Gold prices have boosted the rand
The other notable catalyst for the South African rand is the ongoing gold price rally. Gold has jumped by over 40% this year and is now trading at its highest level on record.
Its performance is an important part for the South African economy because of the vast amounts it produces. While gold mining production has dropped of late it still plays an important role in the economy.
The USD/ZAR exchange rate has plunged because of the ongoing US dollar weakness. The dollar index has plunged from $110 in January to $96 today, and technicals suggest that it has more downside to go in the coming months.
This performance has happened as investors dump the US dollar because of Donald Trump’s policies, including isolationist policies like tariffs. This also explains why gold has jumped in the past few months.
Most importantly, the coalition government has held in place despite challenges, helping the country’s economy show some resilience. The IMF expects that the economy will grow by 1.5% this year from 0.8% last year.
While the perennial unemployment rate remains high, inflation has stabilized in the past few months, helping the central bank to reduce interest rates.
USD/ZAR technical analysis
USDZAR price chart | Source: TradingView
The daily timeframe chart shows that the USD/ZAR exchange rate has plunged in the past few months, moving from the year-to-date high of 19.9280 in April to 17.25 today.
It recently formed a slanted head and shoulders pattern, which is a common bearish continuation pattern in technical analysis. It remains below the 50-day and 100-day Exponential Moving Averages.
Also, the USD/ZAR pair has moved to a key support level that was the lowest level in November last year. Therefore, the pair may continue falling as sellers target the next key support level at 17, the lowest swing in October last year.
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