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USD/ZAR drops below key support: What next for South Africa rand?

By:
on Dec 29, 2022
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  • USD/ZAR exchange rate has been in a strong bearish trend in the past few weeks.
  • South Africa faces significant challenges, especially due to power outages.
  • The South African rand will likely continue falling in the near term.

The USD/ZAR exchange rate has pulled back since November on the back of a relatively weak US dollar. After rising to a year high of 18.60, the South African rand has jumped to 17. So, what next for the vulnerable rand in 2023?

South Africa outages to drag the economy

The South African rand crashed against the US dollar in 2022 as the greenback strengthened. In total, the dollar index rose by more than 6% as the Federal Reserve decided to deliver several rate hikes. The bank boosted rates by 450 basis points during the year.

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In South Africa, the central bank also delivered several rate hikes even as the economy struggled. As I wrote in this report, the biggest challenge that South Africa is facing is on power. Saddled by a mountain of debt, Eskom continued its policy of power cuts in the country. According to Bloomberg, it made power cuts in over 200 days.

The impact of these power cuts on the economy is dire. For one, many manufacturers are having to spend more money on alternative power sources. Similarly, retailers and restaurants that operate on thin margins have also seen their costs soar. Some, like KFC, have decided to close some of their store locations.

Therefore, analysts expect that these powr outages will have a serious impact on the economy. Job cuts will increase while many companies are considering moving to other countries. In its report, the South Africa Reserve Bank (SARB) said that the economy would expand by just 0.1% in Q4 and 1.1% in 2023.

Inflation is also persistent in South Africa, which will push the reserve bank to hike rates during a stagflation. Analysts expect that rates will soar to 8% in 2023.

On the other side of the equilibrium, the Fed is expected to halt rates at the terminal level of 5.1% and then pause to assess the situation.

USD/ZAR forecast

USD/ZAR
USD/ZAR chart by TradingView

The daily chart shows that the South African rand has been gaining against the US dollar. It has managed to move below the important support level at 17.31, which was the highest point in July. The pair has moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved below the neutral point of 50.

Therefore, the outlook for the pair is bearish, with the next key level to watch being at 16.31, which was the highest point in May this year.