USD/ZAR forecast: South African rand surges as a carry trade emerges

The South African rand continued its strong momentum today, reaching its lowest level since April 22nd as a carry trade opportunity emerged. The USD/ZAR pair dropped to 16.4, down sharply from the year-to-date high of 16.90.

Carry trade opportunity strengthens

The USD/ZAR exchange rate continued its recent downward trend this week as the carry trade opportunity strengthened. A carry trade is a situation where investors borrow a low-yielding currency and invest in a higher-yielding one.

In this case, investors are borrowing the 3.75% yielding US dollar and allocating in the 6.75% yielding South African rand.

The case for the carry trade opportunity emerged after analysts at BNP Paribas predicted that the South African Reserve Bank (SARB) will change its tone and start hiking interest rates this year. It is pricing in two rate hikes this year, which will push the headline inflation to 7.25%.

This will be a big reversal as the central bank has been in a strong downward trend, bringing them from a high of 8.25% last year to 6.75% today. These cuts emerged as inflation continued falling before Donald Trump started his war against Iran.

Recently, however, South Africa’s inflation has started amid the war. The most recent data shows that the headline consumer price index rose to 3.1% in March from 3% in February and SARB believes that prices will hit 4% soon. For example, petrol prices have jumped by over 60% since the war started.

On the other hand, the Federal Reserve delivered its interest rate decision on Wednesday last week. As was widely expected, the bank left interest rates between 3.50% and 3.75%. Most notably, officials hinted that they may cut interest rates later this year.

Looking ahead, the USD/ZAR pair will react to the upcoming US non-farm payrolls (NFP) data, which will come out on Friday this week. Economists expect the upcoming report to show that the economy created 60k jobs in April, much lower than the previous 153k. The unemployment rate is expected to remain at 4.3%.

USD/ZAR technical analysis 

USDZAR price chart | Source: TradingView

The four-hour chart shows the USD to ZAR exchange rate has been in a strong downward trend and is now hovering at its lowest level since April 22nd.

It has dropped below the important support level at 16.51, its lowest level on March 3 this year. This was an important level as it was the neckline of the double-top pattern. A double-top is one of the most common bearish reversal signs in technical analysis.

The pair has remained below the 50-day and 100-day Exponential Moving Averages (EMA) and the Supertrend indicator.

Therefore, the pair will likely continue falling in the near term, potentially to the key support at 16.14. On the flip side, the pair may rebound and retest the resistance at 16.5 and then resume the downward trend.