USDZAR: Why is the South African rand parabolic rally continuing?
The USDZAR pair declined slightly as the market remained optimistic that the worst was over for the South African rand. The market is also optimistic that the current reopening will lead to more demand for the rand.
South African rand bottoms
The USDZAR pair rose to a record high of 19.3406 in April as the market reacted to a series of negative data from South Africa. The government announced a nationwide lockdown to prevent the spread of coronavirus. In the same month, the government launched a multibillion-dollar stimulus package that risked widening the budget deficit and increasing the government debt.
Additionally, the country received credit downgrades from Moody’s and S&P Global Ratings while its major bond fund was removed from a fixed income index tracked by large funds.
The market appears convinced that the rand has now bottomed against the dollar since the country has started to open. Indeed, according to Bloomberg, volatility of the South African rand has moderated in the past few weeks. The report said that implied volatility dropped below the actual volatility at the end of March. At the same time, according to the CFTC, speculators have increased their bullish positions for the rand. This means that contracts betting on rand are more than those betting against it.
Third, most oscillators, including the RSI and Stochastic have moved to the oversold levels. Finally, the bond market is sending signals that the situation is calming down. This is mostly because the relentless sell-off of the $3.2 billion has started to ease.
Looking at the daily chart, we see that the USDZAR pair topped recently at about 19.1968, where it formed a double top pattern. At the same time, the RSI has started moving downwards, exiting the overbought territory. Therefore, I expect the pair to continue declining as bears attempt to test the 23.6% Fibonacci retracement level at 18.0635. Still, for the trend to continue, bears will need to move below this level.
On the flip side, a close above 19.1968 will invalidate this prediction because it will send a signal that there are more bulls in the market. This price is important because it is where it formed the previous double top pattern.