USD/ZAR: South African rand runs out of gas as business conditions worsen

The USD/ZAR pair rose by more than 1%, ending the recent ferocious rally of the South African rand. The pair is trading at 16.6600, which is slightly higher than the yesterday’s low of 16.3200.

US dollar strength pushes South African rand lower

The USD/ZAR pair rose partly because of the strength of the US dollar today. The US dollar index, which measures the strength of the greenback against a basket of currencies, rose by about 10 basis points.

The rise of the US dollar is partly because of the Federal Reserve, which delivered a relatively dovish monetary policy statement yesterday.

As was widely expected, the bank left interest rate unchanged at between 0.0% and 0.25%. It now estimates that rates will remain in this level until 2022. The bank also pledged to continue with its open-ended quantitative easing program by buying assets worth about $120 billion every month. $80 billion of these assets will be Treasuries while $40 billion of them will be mortgage securities.

Officials at the Fed expect the unemployment rate will be between 9% and 10% in the fourth quarter. As a result, the US dollar rose as global investors rushed to its safety. At the same time, global stocks fell, with the DAX, CAC 40, and FTSE 100 falling by almost 2%.

Later today, we will receive the jobless claims data and factory gate inflation data from the US. According to the Wall Street Journal, analysts expect that initial jobless claims were 1.6 million last week, compared to a peak of 6.8 million in March.

South Africa mining and business confidence tank

The USD/ZAR also rose because of the falling business confidence and a sharp decline in mining. A survey by Rand Merchant Bank (RMB) released yesterday showed that business confidence dropped to 5 in the second quarter from 18 in Q1. This was the weakest figure released since 1985. In a statement, the bank’s researchers said:

“A reading of 5 means just about every respondent in the second quarter was unsatisfied with the prevailing business conditions.”

While the confidence dropped, there are signs that it will improve in the coming months. For one, the government is easing restrictions in movements. It has also unleashed the biggest stimulus in the country’s history.

Meanwhile, the mining sector saw its weakest performance in almost 40 years. According to the mining ministry, mining production dropped by 47.3% in March after rising by 5.8% in the previous month. As the crisis continued, gold production dropped by 59.6% after rising by 11.8% in February. Platinum production fell by 62%.

While the mining sector has reopened, the biggest risk is an outbreak of infection in the mines. Miners are also facing the challenge of testing their workers. According to Bloomberg, it can take a few hours for a miner to test its workforce.

USD/ZAR technical outlook

On the daily chart, the USD/ZAR pair formed a hammer pattern yesterday after it moved below the 50% Fibonacci retracement level. The price is still above the 50-day and 25-day exponential moving averages while the RSI has just emerged from the overbought zone.

Because of the hammer pattern, there is a likelihood that the current pullback pattern will push the pair to the 38.2% retracement level at 17.2876. Still, in the medium-term, there is a possibility that the pair will continue falling.