USDZAR: Why is the South African rand on the defensive again?

The USDZAR pair is down slightly today as investors reflect on the recent downfall of the South African rand. The pair is trading at 17.3900, which is slightly below the day’s high of 17.4670.

South African rand momentum eases

In May and first week of June, the South African rand was in what I called an unstoppable rally. In the past few days, the trend has reversed and the rand is now in the defensive. Since June 10, the USDZAR pair has risen from a low of 16.3350 to the yesterday’s high of 17.5050.

As I wrote a few days ago, the sharp reversal of the USDZAR is the fact that the number of coronavirus cases in South Africa is rising. Data from Worldometer show that the country confirmed 3,478 cases yesterday and 4,078 on Wednesday. This has happened at a time when the country is reopening. As a result, analysts are troubled that South Africa is heading towards disaster.

USDZAR rises as South Africa debt balloons

Another reason why South Africa rand (USDZAR) is under pressure is that South African public finances are not okay. It was only that the country announced its plan to launch a $86 billion infrastructure investment. This amount is so huge that it represents about 22% of the total GDP.

This fundraising is enormous because the South African economy was in trouble before the coronavirus pandemic. More so, the country has received credit rating downgrade by all the three major rating agencies.

A day after the proposal was announced, Finance Minister Tito Mboweni also expressed concerns about the economy. In a statement, he said:

“A sovereign-debt crisis is a very serious matter and we are looking it in the eye by 2024 if we do not redo our budget, if we do not manage our house finances carefully.”

Download our Q2 Market Global Market Outlook

USDZAR technical outlook

On the daily chart, the USDZAR pair rally has found strong resistance at 17.5000, which is along the 50-day exponential moving averages. This resistance is also slightly below the 23.6% Fibonacci retracement level. Also, the pair is forming a bullish flag pattern after the sharp increase on June 11. Therefore, the pair may continue to rise as bulls target the next resistance at 18.000.

Alternatively, a move below 17.000 will invalidate this thesis. This price is an important psychological level as well as below the 38.2% retracement level.

Don’t miss a beat! Follow us on Telegram and Twitter.

More content