The USDZAR pair continued its descent as the South African rand momentum continued to fall. The pair is now trading at 17.0160, which is the lowest it has been since March 18. Let us look at the main reasons why the rand has been in a strong upward momentum.
South Africa reopening
The biggest contributor to the USDZAR downward trend is the South African reopening. The country has been easing some of the restrictions it imposed in April as the coronavirus pandemic intensified. Today, South Africa has relaxed some of these restrictions and most businesses are now doing business.
Still, the risk is that the country is not prepared well to handle a surge in cases. This is partly because the country is still seeing higher than average number of cases. Yesterday, the ministry of health reported more than 1,455 new cases, which is significantly higher than May 26, 649. Therefore, as the country reopens, there is a likelihood that more cases will be reported.
As a result of the shutdown, business activity continued to decline in May. According to Markit, the PMI declined to a record low of 32.5 from the previous 35.1. All the 13 indexes of the PMI, including inventories, employment, and output declined sharply. In a statement, Markit said:
“It is likely with this in mind that the government has sought to reopen large parts of the economy in June, which may lead to a strong bounce-back in PMI readings if businesses are able to restart quickly. However, the large drop in employment seen in May is worrying, as firms may struggle to operate at capacity levels seen pre-COVID-19. “
US dollar weakness
Another significant contributor to the weakness in the USDZAR is the sharp decline in the US dollar. The greenback has fallen against most currencies, except the Japanese yen mostly because investors have been moving back to other currencies like the rand, euro and the Australian dollar. The chart below shows how the dollar index has fallen.
US dollar index has been falling
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USDZAR technical outlook
The USDZAR pair has been on a downward trend since peaking at above 19.00 in April. The pair has moved below the 38.2% Fibonacci retracement level. It is also below the 50-day EMA, and yesterday, it moved lower than the 100-day EMA. Therefore, there is a likelihood that the pair will continue falling as bears attempt to test the 50% retracement at 16.6248.
On the flip side, a move above the 38.2% retracement at 17.2876 will invalidate this prediction because it will signal that there are more buyers in the market.