If the dollar is poised to recover and the markets continue to trade with their risk off tone, then surely the USD/ZAR will be at risk, right? The fundamentals aren’t looking great, negative surprises on the economic data front are mounting up: unemployment rose above 25% in Q1, while manufacturing production and retail sales were also weaker than expected.
Election risk has been and gone, but the win for the ANC suggests more of the same and the potential for further strike action down the line.
But even with the fundamental evidence stacking up, USD/ZAR remains weak. After trying to stage a rebound earlier this week, it has stumbled at major resistance – the 200-day sma at 10.4227. Unless it can break above 10.5847 – the high from 2nd May – the bearish price pattern of lower highs and lower lows remains in place. At this juncture there is still potential for further downside.
If this pair can’t break above the 200-day sma, then key support comes in at 10.2547 – the 61.8% retracement of the September 2013 – January 2014 advance. In Fibonacci terms, 61.8% is a major level, and if we break below here then we could see further downside.
The fundamental outlook
With the ZAR defying its fundamentals and retaining its strength, it could be dependent on strength in the USD before we can see a reversal in this pair. The dollar rally from earlier this week seems to have stalled on Friday, so watch out for next week’s Fed minutes and Fed speakers to see if they can trigger US Dollar Index strength.
Uber-doves including Yellen and Dudley are speaking on 20TH and 21st May, so, on balance, the risks could be to the downside for USD/ZAR if they continue down their dovish path. If they do, then watch the Fib support level mentioned above, which could cushion any downside in the near-term.
Takeaway:
- The ZAR seems to be defying gravity, and is strengthening even though the South African economic fundamentals remain weak.
- The rally in USDZAR seems to have stalled at the 200-day sma.
- There could be further upside for ZAR, especially if next week’s Fed speakers stick to their recent dovish testimony.
- Key support remains at 10.2547 – the 61.8% Fib retracement of the September – January advance, this could cushion any downside.
