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Where next for the South African rand amid further political turmoil?

The South African rand has been one of the best performing currencies globally in 2018, but there’s a risk that political turmoil gets in the way. We look at the technical outlook for the rand.

Source: Bloomberg

South African political turmoil

The South African rand has been among the best performing currencies globally since December last year. The initial domestic catalyst for rand strength was the election of new African National Congress (ANC) president, Cyril Ramaphosa. The new president of the leading political party in South Africa has inspired business confidence, with his pledges to tackle corruption within the country as well as his proven business savvy. In his brief stint as the political head of the ANC, we have already seen action being taken within ailing state-owned power utility, Eskom, with a massive board reshuffle as well as active investigations into state capture reports.

Markets have also been captivated by the possibility that the South African president will be recalled by the ANC, an initiative being led by Ramaphosa. After multiple meetings with the president, it would appear that Jacob Zuma remains reluctant to stepping down, and it has been suggested that he is looking at trying to obtain immunity against allegations of corruption for him and his family before relinquishing the presidency.

Jacob Zuma about to stand down?

News that Zuma’s State of the Nation Address has been postponed at the 11th hour, has fueled speculation that his departure may be imminent. The president of South Africa faces a vote of no confidence on the 22 February, a motion led by the opposition party the Economic Freedom Fighters.

Due to a factional divide within the ANC, this vote on the South African president’s future has a higher probability than previous votes have had in terms of resulting in his removal. ANC credibility will be on the line if opposition parties are the ones to initiate the president’s departure, and the leading political party will be concerned about its potential impact on the 2019 presidential elections. With this in mind, it would appear that the ANC might increase its efforts to recall Zuma, before the vote of no confidence on 22 February.

The technical outlook for the rand

The USD/ZAR is currently trading in a firm downtrend. A short-term rebound has taken the currency pair to resistance at R12.22/$. Circled blue in the chart below, we see how the USD/ZAR price has reversed off this level, and looks to now be continuing the longer-term downtrend (dollar weakness/rand strength). The near-term favoured target is R11.80/$, a break of which would consider R11.35/$ as the next support target. Should the price instead move to close above R12.22/$, the bearish assumptions would be deemed to have failed.

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