USD/ZAR: South African rand could rally according to this pattern

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 wife, son,… read more.
on Apr 5, 2021
  • The USD/ZAR has formed a bearish flag pattern on the four-hour chart.
  • Analysts at Citi are warning about Emerging Market currencies.
  • The strong US employment numbers have led to a reflation trade.

The USD/ZAR price has formed a bearish flag pattern as the market price-in sooner rate hikes in the United States after the strong employment numbers. It is trading at 14.6560, which is slightly above last week’s low of 14.5905.

USD/ZAR
USD/ZAR chart

Reflation trade after strong US jobs data

The USD/ZAR is in a tight range even as market analysts warn about emerging market currencies after the recent strong data from the US. Last week, data by Markit and the Institute of Supply Management (ISM) revealed that the manufacturing sector was relatively strong in March. This happened as demand and output rose and as manufacturers remained optimistic about the future of the US economy. 

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And on Friday, the Bureau of Labour Statistics (BLS) reported strong US employment numbers. In total, the economy added more than 900,000 jobs in March as the unemployment rate dropped to 6.0%. The number of hours worked and participation rate also increased. Later today, the ISM is expected to release the relatively strong non-manufacturing PMI numbers.

Therefore, analysts warn that emerging market currencies, including the South African rand will remain under pressure. In a note, an analyst at Citi said:

“This quarter can be big for the dollar and not necessarily amazing for emerging markets. We don’t believe the U.S. curve is pretty much done adjusting. Between now and June/July, we could see a further leg higher here in yields.”

Analysts also warn that emerging market currencies will struggle because of the relatively slow rollout of the coronavirus vaccine. While South Africa has started vaccinations, the pace has been relatively slow. In the country is on track to receive more than 40 million doses in the next few months. Later this week, the USD/ZAR will react to the latest South Africa’ PMI numbers by Standard Bank.

USD/ZAR technical forecast

USD/ZAR
USD/ZAR chart

The four-hour chart shows that the USD/ZAR rose to a high of 15.10 in March. It then erased those gains and is trading at 14.6560. On the four-hour chart, it has formed a bearish flag pattern that is shown in black. In technical analysis, this pattern is usually a sign that the price will resume the downward trend. It has also moved below the short and medium-term moving averages. Therefore, in my view, the downward trend will likely resume as bears target the key support at 14.50.

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