Why I am buying USD/ZAR after the SARB decision.
- The USD/ZAR pair rallied to the highest level in more than a year.
- It has rallied by more than 16% from its lowest level in June.
- The pair will likely keep rising in the near term.
The USD/ZAR pair soared to the highest level since November 2020 on Thursday. This jump happened after the South Africa Reserve Bank (SARB) published its interest rate decision. It is trading at 15.61, which is about 16.8% above the lowest level in June this year.
SARB interest rate decision
The SARB delivered its interest rate decision on Thursday. In it, the bank surprised the market by hiking interest rates by about 25 basis points. The benchmark rate rose from 3.50% to 3.75%. This was a notable decision since most analysts were expecting the bank to hold rates steady. It was also a surprise since it was the first rate hike in more than two years.
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The SARB decision was a significant divergence from what the Central Bank of the Republic of Turkey (CBRT) did. Even with Turkish inflation surging, the bank decided to slash interest rates for the third straight month.
The SARB decision came at an important time for the South African economy. Inflation has surged while the unemployment rate has surged. This means that the once-promising economy has moved into a stagflation. Stagflation is defined as a period of sluggish GDP growth that is accompanied by high inflation.
Data by the South African statistics agency showed that the headline inflation rose to 5% in October. That was in line with what most analysts were expecting. Most importantly, it moved above 4.5%, which is the mid-point for the bank. The bank’s decision was also to send a message to investors that the SARB will not act as the CBRT is acting. In a statement, a fund manager at Matrix Fund Managers said:
“The growth constraints are not necessarily on the monetary side, but rather on structural constraints such as labour-market inflexibility, skills levels, electricity supply and the regulatory burden on small, medium- and micro-enterprises.”
The daily chart shows that the USD/ZAR pair has been in a major bullish trend in the past few weeks. Notably, the pair is trading at an important level since it is along the neckline of the inverted head and shoulders pattern.
Meanwhile, the bullish trend is being supported by the 25-day and 50-day moving averages (MA). Therefore, since it has formed an inverted H&S pattern, there is a likelihood that it will keep rising. A conservative estimate is that it will rise to 14.90. This is the same distance from the head to the shoulder.
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