USD/ZAR slides as SARB governor rules out QE in South Africa

The USD/ZAR pair declined by almost 1% as investors react to hawkish comments from South Africa’s central bank (SARB) governor. The pair is trading at 17.2960, which is a few pips below this week’s high of 17.5080.

South African rand harsh reversal

The USD/ZAR pair has been in an upward trend since June 11, when it was trading at 16.4715. This has been a harsh reversal for the rand, which was among the best-performing currencies in May.

The currency has declined because the number of coronavirus cases in South Africa has been rising. According to the country’s ministry of health, the country has confirmed more than 83,000 infections and above 1,700 deaths. At the same time, the number of new cases per day is more than 3,400, while active cases are rising.

The challenge for the South African rand is that the government is reopening the economy even as cases rise. This risks worsening the situation in the cash-strapped country.

The USD/ZAR has also reversed because of government spending plans. According to Bloomberg, the government is planning an infrastructure spending boom in the next decade. Officials have told asset managers and banks that they are planning to invest more than $86 billion. This amount is equivalent to 22% of the country’s GDP.

Analysts worry that the borrowing binge will push the economy in uncharted territory, considering the debt to GDP ratio was 62.2% in 2019. Indeed, Moody’s, Fitch, and S&P have already downgraded the economy citing a slowing economy and widening budget deficit.

The finance minister agrees. In a statement to Bloomberg, he said that the country needed to reduce the budget, saying:

“A sovereign-debt crisis is a very serious matter, and we are looking at in the eye by 2024 if we do not redo our budget if we do not manage our house finances carefully.”

Central bank rejects quantitative easing

The USD/ZAR pair dropped today after the central bank governor rejected calls for quantitative easing in South Africa.

In recent weeks, many economists and policymakers have been asking the bank to help bankroll the government’s response to the virus. By so doing, the bank would be copying the actions of the Bank of England, Federal Reserve, and Bank of Japan.

In a statement, Letja Kganyago said that a QE would add more strain to the National Treasury. He said:

“A big quantitative-easing operation wouldn’t lift the budget constraint. Instead, it would end up saddling Treasury with yet another bankrupt government enterprise asking for a bailout.”

Further, he warned that implementing a large QE would push interest rates to zero or sterilise the asset purchases by adding rands into its balance sheet. At the same time, pushing interest rates to zero would lead to higher inflation.

USD/ZAR technical outlook

The USD/ZAR is trading at 17.2960. On the daily chart, the price is slightly above the 38.6% Fibonacci retracement level. It has also found significant resistance at the 50-day EMA. Also, the pair seems to be forming a bearish flag pattern, which is shown in green above. Most importantly, the bearish candle today is smaller in size than the bullish candle made yesterday.

This means that the pair will likely continue rising as bulls attempt to move above 17.5000. On the other hand, a break below the support at 17.1000 will mean that bears are in control. That will see the price attempt to test this week’s low at 16.3320.