USD/ZAR: South African rand vicious rally accelerates but risks remain

The USD/ZAR dropped by more than 0.70% as the momentous rally on South African rand accelerated. The pair is trading at 16.7525, which is the lowest it has been since March 18.

South African rand rallies after government seeks IMF loan

The South African rand has been in a significant rally against the US dollar and other currencies like the euro. The currency has gained by more than 9.50% against the US dollar in the past month alone. It has gained by more than 7% against the British pound and by more than 5% against the euro.

The rand gained momentum today after the South African government started negotiations with the IMF. The government is raising more than $4.2 billion from the lender as it seeks to boost its economy after being battered by the coronavirus pandemic.

The decision by the government to raise money from the IMF is significant because the ANC had always ruled out against using the lender. Matthew Parks, a parliamentary coordinator in the country told Bloomberg:

“One of the things the ANC had in its DNA, you don’t want to go the IMF, you will undermine your sovereignty.”

The new funding will be part of the $26 billion fiscal stimulus that the government unleashed in April. Most of these funds will be used to help the biggest economy in Africa navigate the risks posed by the coronavirus pandemic.

South Africa lost investment grade rating

The pandemic has had significant implications to the economy. According to the government’s statistics office, the economy will contract by 16 per cent this year and the unemployment rate will rise to more than 30%. Worse, the economy was in a recession even before the crisis, mostly because of bailouts for South African Airlines and Eskom.

At the same time, South Africa’s debt is set to soar. The treasury estimates that the debt to GDP ratio will reach 80% in 2028 from 56.7% in 2019.

Worse, the country has recently lost its investment-grade rating by the three biggest rating agencies in the world. In March, Moody’s downgraded South African debt from Baa3 to Ba1. A few days later. Fitch Ratings downgraded the country to BB and maintain a negative outlook. S&P Ratings was the last agency to put the country into junk status, saying:

“The COVID-19 health crisis will create additional and even more substantial headwinds to GDP growth, owing to a strict five-week domestic lockdown, the markedly weaker external demand outlook, and tighter credit conditions.”

USD/ZAR drops as appetite for South Africa increases

Pushing the USD/ZAR pair further downwards is the increased appetite for South Africa’s assets. In addition to the rand, the country’s stocks and bonds have all rallied. Indeed, according to Bloomberg, the country’s benchmark index has rallied by more than 45% since March. Its bonds too have been in high demand.

Still, the biggest risk for South Africa and the rand is the coronavirus pandemic. The disease has killed almost a thousand people in the country and the active cases have increased to more than 22,000.

The rising cases could pose a major to the country. For example, an outbreak in its big mines could disrupt the mining process.

USD/ZAR technical outlook

On the daily chart, the USD/ZAR pair has been in a strong downward trend since April 20, when it peaked at 19.3615. The price is below the 50-day and 100-day exponential moving averages while the RSI has dropped to the lowest level since December last year. Additionally, the price is slightly above the 50% retracement level. A move below this level will see the price continue falling as bears attempt to move below 16.000, which is also along the 61.8% retracement level.