USD/ZAR: Here’s why the South African rand could slump to 17.00
- The USD/ZAR pair has been in a strong upward trend.
- This performance is because of the risk-off sentiment in the market.
- The rising bond yields in the market have contributed.
The USD/ZAR price rose to the highest level since January 28 as the sell-off of emerging market currencies gained steam. The pair is trading at 15.2675, which is 6% above the lowest level this year.
South African rand under pressure
The South African rand had a great 2020. It rose by more than 25% against the US dollar between March and December. It also rose by 18% against the British pound and by 16% against the euro.
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This performance was because of the risk-on sentiment in the market. Other risky assets like cryptocurrencies and technology stocks also rallied.
In the past few weeks, the trend has reversed as the USD/ZAR has rallied. Analysts at several forex brokers and investment banks credit this reversal to the risk-off sentiment in the market. It has been triggered by a recent sell-off of US Treasury bonds, which has pushed their yields to the highest level in more than 12 months.
Yields have risen because the market seems to suggest that the US inflation rate will continue rising. Furthermore, it has already risen from last year’s low of less than 0.5% to 1.4% in January. As such, they believe that the upcoming stimulus in the US will push the rate higher.
A high inflation rate in the US will lead to high-interest rates and monetary policy tightening by the Federal Reserve. High rates in the US will then make emerging market and risky assets less attractive.
The USD/ZAR price has risen even after the relatively positive economic data from South Africa. This week, data by Markit and Standard Bank showed that the manufacturing PMI rose from 50 in January to 53 in February.
Further, the number of coronavirus cases has been falling and the country aims to administer more than 700,000 vaccines by end of this month. In addition, inflation is rising, and is expected to rise further as the price of crude oil tests new highs. This will put more pressure on the central bank to act.
The USD/ZAR formed a double-bottom pattern at the 14.40 level in February. It has been rising since then. On the daily chart, the 14-day and 28-day exponential moving averages (EMA) have made a bullish crossover. Also, the price is slightly below the neckline of the double bottom at 15.66. Therefore, the pair will likely continue rising as bulls target the next key resistance at 1.1700.