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South African rand price blows out on weapons allegations and energy crisis

The ZAR has found some domestic cause for depreciation from escalating energy woes and allegations that South Africa provided weapons to a sanctioned Russia.

Source: Bloomberg

The rand has had a dismal week, pushing to its worst levels in history against majors such as the US dollar, Euro, and British pound.

While a stronger dollar and risk aversion has weighed, the ZAR’s underperformance against emerging and commodity-based currency peers highlights domestic catalysts for the short-term depreciation.

Energy crisis at the forefront of concerns

An escalating load shedding schedule as South Africa moves into its winter months sees increasing fears of a power grid collapse. South Africa’s energy crisis is wreaking havoc on economic growth and the cost of doing business within the country.

South Africa providing weapons to Russia?

Adding to the short-term woes prominent, is comments from a US ambassador to South Africa that local government loaded weapons and munitions to a sanctioned Russian cargo ship late last year. The office of the Presidency has refuted these claims awaiting evidence thereto to support the allegations and launching an inquiry into the allegations.

Rates pressure

Unfortunately, South Africa can ill afford further reason to discourage and increase risk for foreign investment into the country. The rand weakness reflects the increased risk and could prompt a more hawkish Reserve Bank, who might be forced to tighten monetary policy further than initially expected this year, to stem capital outflows and try find price stability.

USD/ZAR – Technical view

Source: IG Charts
Source: IG Charts

The USD/ZAR has now extended its uptrend trading through our R18.70/$ resistance level. The move above this level confirms an upside breakout from the previously guided R17.70/$ to R18.70/$ range and continuation of the longer-term uptrend (rand weakness / dollar strength).

The upside breakout now sees the all-time high at R19.35/$ being tested. The currency pair has however also moved into overbought territory.

We are now looking for a pullback from overbought territory to end with a bullish price reversal closer to one of the labelled support levels for long entry, before ultimately targeting a move towards channel resistance at R20.05/$. In this scenario, a close below the reversal low might be used as a stop loss indication.

GBP/ZAR – Technical view

Source: IG Charts
Source: IG Charts

The GBP/ZAR has seen exponential gains in the near term to extend the longer-term uptrend. These gains have now taken the price through channel resistance and into all-time high territory. The price is now testing a 161.8% Fibonacci extension level at R24.24/GBP. Through this level, R25.40/GBP becomes the next upside target derived from a 261.8% Fibonacci extension level.

The move higher has pushed the currency pair into overbought territory.

Our preference is to look for a pullback from overbought territory to end with a bullish price reversal. In this scenario a close below the reversal low might be used as a stop loss indication for the trade, while in search for the upside resistance targets.

EUR/ZAR – Technical view

Source: IG Charts
Source: IG Charts

The EUR/ZAR has also seen exponential gains near term to extend the longer-term uptrend. These gains have now also taken the price through channel resistance and into all-time high territory. A 161.8% Fibonacci projection provides a further upside target at R21.45/EUR.

The move higher has pushed the currency pair into overbought territory.

Our preference is to look for a pullback from overbought territory to end with a bullish price reversal. In this scenario a close below the reversal low might be used as a stop loss indication for the trade while in search for the upside resistance targets.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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