South African rand looks set to remain strong short-term

Ahead of the South African Reserve Bank’s monetary policy meeting, the rand has started to resume strength against its major currency peers. With lending rates expected to stay unchanged, the drivers appear to be external.

South African rand
Source: Bloomberg

The South African central bank is expected to leave lending rates unchanged at its next policy meeting, and therefore the renewed strength for the rand appears to be driven by external rather than domestic catalysts. Gains in the rand are accompanying gains in other emerging market currencies, as short-term appetite for riskier assets improves and the near certain December increase in US lending rates appears mostly digested.

The chart below shows the rand’s performance against the US dollar and reflects how the market is summising all the external and domestic catalysts. 

Since about September, USD/ZAR has been trading in a broad range between R14.75/$ and R13.19/$. The pair now looks to have formed a reversal near the resistance of this range, which is highlighted blue. The price reversal is supported by the stochastic crossing out of overbought territory.

These are bearish indications in technical analysis terms and these favour short-term dollar weakening against the rand. R13.40/$ becomes the initial support target favoured for the currency pair, a break of which further favours a move to R13.19/$.

However should USD/ZAR instead move to close above resistance at R14.75/$, the bearish indications for the pair highlighted would be deemed to have failed. 

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