USD/ZAR: Historic fall of South Africa Q2 GDP weighs on rand

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Sep 8, 2020
  • The USD/ZAR pair rose today as traders reacted to the historic drop of South Africa Q2 GDP.
  • South Africa's economy contracted by 51.0% in the second quarter, pushing the country to its longest recession
  • The rand has also weakened because of the relatively stronger US dollar.

The South African rand dropped today as traders reacted to a historic contraction of the country’s economy. The USD/ZAR and GBP/ZAR pairs rose by 1.50% and 0.60%, respectively.

GBP/ZAR and USD/ZAR
GBP/ZAR and USDZAR reverses

South Africa Q2 GDP falls

The South African economy has been affected significantly by the coronavirus pandemic. The country has confirmed more than 639,000 cases and more than 15,000 deaths. As a result, the country’s unemployment rate has surged to more than 30%. The number of bankruptcies has also risen.

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The situation has been made worse considering that the country was in a financial crisis before the pandemic. The South African economy contracted by 1.4% in the fourth quarter of 2019 followed by a 1.8% contraction in Q1 2020.

And today, data released by the Bureau of Statistics showed that the country’s economy contracted by 17.1% in the second quarter. Analysts were expecting the economy to weaken by 16.5%. Subsequently, the economy weakened by 51.0% on an annualised basis. This is the biggest contraction ever recorded and the longest recession in 28 years.

This decline happened because of a 74% contraction of the manufacturing sector. The trade, catering, and accommodation sectors contracted by 67% as more people stayed at home. A “collapse” of international travel also contributed to this.

Meanwhile, the transport and communication sectors fell by 67.9% while the mining sector declined by 73%. Most tragically, the vital financial and business services fell by 29%.

The sharp contraction of the South African economy is worse than that of its peer countries. For example, the Turkish economy weakened by 9.9% in the second quarter. The Brazilian economy weakened by 9.8% while Mexico dropped by 18%. Among its bigger peers, the South African economy underperformed the US, Europe, and China.

Stronger US dollar

The USD/ZAR pair also rose because of the overall strength of the greenback. The dollar index, which measures the strength of the currency against a basket of peers, is up by more than 0.50%. It has gained by more than 0.90% this month, erasing the losses it made in the previous month.

Meanwhile, the Wall Street Journal dollar index, which compares the dollar against a bigger basket has jumped by more than 1% this month.

The dollar has gained because of the recent strong data from the United States. On Friday, data showed that the US unemployment ratedropped to 8.4%. Another data by Markit and ISM showed that the US manufacturing and services PMIcontinued to rise in the previous month. Retail sales, industrial production, durable goods orders and housing data have been relatively strong.

These numbers mean that the Federal Reserve could start hiking rates faster than what analysts were expecting.

USD/ZAR technical outlook

USD/ZAR
USD/ZAR technical chart

The four-hour chart shows that the USD/ZAR pair formed a double bottom pattern at the 16.5516 level. This pattern is usually a good reversal pattern. Also, the price is along the upper line of the Bollinger bands, which is a sign that bulls are in control. It is also slightly below the 50% Fibonacci retracement level. Therefore, the price is likely to continue rising as bulls aim for this retracement level at 17.0572.

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