USD/ZAR: Will the ongoing South African rand sell-off last?

Written by: Crispus Nyaga
February 17, 2021
  • USD/ZAR bounced back today mostly because of the strong US dollar.
  • South Africa released relatively mild inflation numbers.
  • Analysts believe that South Africa’s inflation will keep rising.

The USD/ZAR price bounced back today after the relatively mild inflation numbers from South Africa and the strong US dollar. The pair is trading at 14.78, which is 2.5% above this week’s low of 14.40.

USD/ZAR price action

Mild South African inflation

South Africa’s consumer prices rose by 0.3% in January leading to an annual increase of 3.2%. The monthly increase was slightly lower than the median estimate of 0.4%. In the same period,  core CPI increased by 3.3%. 

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Still, analysts believe that the country’s inflation will continue rising, helped by higher crude oil prices. The price of Brent, which determines South Africa’s oil prices, rose to $60 this week. This is substantially higher than last year’s low of $15. 

Further, as part of the government funding program, Eskom is expected to increase electricity tariffs in the coming months. Higher oil and electricity prices will likely translate to a higher rate of inflation.

Higher inflation will then push the South Africa’s Reserve Bank (SARB) to push interest rates higher. In fact, its most recent rate decision, the bank left rates unchanged and provided hints of a possible rate hike. Further, forward futures contracts are also pricing-in a 0.46% rate increase later this year. South Africa’s local currency government bonds are also providing hints of a rate hike.

Therefore, the USD/ZAR is rising because of the relatively stronger US dollar. After days of weakening, the greenback has turned higher as forex investors start pricing-in higher inflation. 

Dollar index
US dollar index

In the past few weeks, the government bonds have been rising, suggesting that inflation will also rise leading to higher interest rates. This trend has been because of the high hopes of a $1.9 trillion stimulus package.

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USD/ZAR technical outlook

USD/ZAR chart

On the hourly chart, the USD/ZAR started rising yesterday. It rose to an intraday high of 14.80, which is slightly above the 23.6% Fibonacci retracement level. The 15-period and 25-period exponential moving averages (EMA) have also made a bullish crossover while the Relative Strength Index (RSI) has moved close to the overbought level. Therefore, in the near term, the pair will likely continue rising as bulls target the 38.2% retracement at 14.88.