USD/ZAR: Here’s why the South African rand is retreating

Written by: Crispus Nyaga
February 25, 2021
  • The USD/ZAR price spiked today as the US yields continued rising.
  • The South African rand fell even after strong PPI data.
  • The pair has formed a head and shoulders pattern.

The USD/ZAR price launched higher today even after the relatively strong South African producer price index (PPI) data. It rose to 14.726, which was 1.2% above the intraday low of 14.47.

USD/ZAR price action

South African rand under pressure

The USD/ZAR price rose today as the overall sell-off of emerging market currencies continued. The Turkish lira lost about 0.45% against the US dollar while the Argentinian peso fell by 0.30%. 

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This price action happened mostly because of the rising Treasury yields in the United States. The yields on the ten-year government bonds rose to the highest level since February last year. The five-year reached its highest point since March and analysts expect that this trend will continue.

In most cases, the rising US yields are a negative thing for the South African rand. That’s because when they rise, the appetite for risk assets tends to fall since investors can get higher yields in the United States. In a note, an analyst at MUFG said:

“A sharp move higher in US yields, especially real yields could increase downside risks for EM FX more broadly if not backed up by stronger fundamentals,”

The USD/ZAR rose even after the relatively strong economic data from South Africa. According to the country’s statistics agency, the producer price index rose from 0.2% in December to 0.8% in January. This was a better reading than the median estimate of 0.4%. This increase led to an annualised gain of 3.5%, better than the expected 3.1%. 

These numbers came a week after the agency published strong consumer price index (CPI). In total, the headline CPI in South Africa rose from 3.1% to 3.2%. Therefore, the data point to a potential interest rate hike later this year or early next year.

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USD/ZAR technical outlook

USD/ZAR chart

The four-hour chart shows that the USD/ZAR price rose to an intraday high of 14.9225. The price managed to cross the 25-period and 15-period weighted moving average while the Average True Range (ATR) has continued to rise. As you will find in our free forex course, a rising ATR is a measure of rising volatility.

The pair also seems to have formed a head and shoulders pattern that is shown in blue. Therefore, there is a possibility that it will ultimately resume the downward trend in the near term.