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The USD/ZAR exchange rate drifted downwards this week as the US dollar index (DXY) rally eased. The pair retreated to a low of 18.75, much lower than this month’s high of 19.63. It has risen by more than 12% from the lowest level this year.
US dollar index retreats
The USD to South African rand rate retreated slightly as the US dollar index dropped from the year-to-date high of $108 to $106. The DXY retreat happened as investors embraced a risk-on sentiment, as evidenced by the strong performance of American equities.
The Dow Jones, S&P 500, and Nasdaq 100 indices rose by more than 1% on Monday as Western countries worked to prevent a full-scale war in Israel. Joe Biden will visit the country on Wednesday as a show of solidarity.
The USD/ZAR pair has also retreated after a relatively positive report by the IMF. In its economic forecasts, the IMF believes that South Africa will overtake Nigeria and Egypt to become the biggest economy in Africa. It expects the economy will reach $401 billion compared to Nigeria’s $395 billion.
Nigeria and South Africa are going through numerous challenges. In Nigeria, the local currency has become almost worthless while South Africa’s power crisis has continued. Many South African cities and towns still receive power for a few hours every day.
On a positive side, South Africa’s inflation has moved downward in the past few months. The most recent data showed that annual inflation dropped to 4.7%, the lowest level in over two years. They increased by 0.9% on a month-on-month basis.
South Africa’s inflation remains inside the central bank’s range od 3% and 6%. Therefore, there is a likelihood that the SARB will maintain rates at the current level for a while. Similarly, the Fed is expected to leave them unchanged between 5.25% and 5.50% in its November 1st meeting.
USD/ZAR technical analysis
Turning to the daily chart, we see that the USD/ZAR exchange rate has drifted downwards in the past few days. This breakout happened after the pair formed a rising wedge pattern, which is usually a bearish sign. It has now moved below the 25-day and 50-day exponential moving averages (EMA). Therefore, because of the rising wedge, there is a likelihood that the pair will continue falling as sellers target the key support at 18.50. The stop-loss of this trade will be at 19.0. This view is in line with my last South African rand forecast.
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