South African Rand’s Pause for Breath Helps GBP/ZAR and USD/ZAR Steady

• USD/ZAR, GBP/ZAR steady as ZAR rally stalls
• GBP/ZAR could hold above 18.97 in short-term
• USD/ZAR supported at major level near 14.52

© Lefteris Papaulakis, Adobe Images

The South African Rand has paused for breath in most recent trading following a strong and sustained rally to open the new year, while this nascent consolidation of earlier gains has enabled USD/ZAR and GBP/ZAR to tentatively stabilise near major levels of support on the charts.

South Africa’s Rand has been overtaken by only the Brazilian Real in its 2022 rally and remained among the top performers within the G20 universe on Tuesday even as it ceded ground to the Dollar, Sterling and other currencies.

The uptrend has stalled since late March, however, which was roughly the point when treasury announced “a neutral to slightly positive budget” and the South African Reserve Bank (SARB) lifted its cash rate for a third time since before the onset of the coronavirus crisis.

“South Africa’s FRA curve has subsided, now factoring in about a 1.50% lift in the repo rate this year, from nearer 2.00%, but this is likely still overdone,” says Annabel Bishop, chief economist at Investec. 

Above: GBP/ZAR shown at daily intervals with Fibonacci retracements of June 2021 rally indicating possible levels of technical support, and shown alongside USD/ZAR. Click image for closer inspection. 

The late March stall did also coincide with the point when trade partner China’s largest city economy, Shanghai, was placed back in 'lockdown’ as part of an effort to contain the Omicron coronavirus strain, which has also recently been seen in other parts of the country. 

“After a strong run, and with USD/ZAR now standing near 14.60, risks over both the nearer term and medium run appear two-sided; to reflect this, we are shifting our nearer-term forecasts to 14.75 and 14.50 in 3- and 6-months, respectively (from 15.00 and 14.75 previously), and we leave our 12-month target unchanged at 14.50),” says Kamakshya Trivedi, co-head of global foreign exchange strategy at Goldman Sachs, in a recent note.

Tuesday’s declines by the Rand coincided with the release of employment data for the final quarter that showed the number of unemployed persons climbing from 7.6mn to 7.9mn, which lifted the unemployment rate from 34.9% to 35.3%. 

The number of unemployed has risen by more than one million in South Africa since the onset of the coronavirus crisis in January 2020 and rose further in the final quarter of 2021 despite a sharp elevation of natural resource prices.

Above: USD/ZAR shown at daily intervals with Fibonacci retracements of June 2021 uptrend indicating medium-term areas of technical support. Click image for closer inspection.  

“While 2021’s 11% revision to GDP rapidly aided economic recovery, it did not also solve the job loss,” Investec’s Bishop says.

Resource prices have benefited the mining sector and South African public finances during recent months and have been widely cited as a key contributor to the rally by the Rand, which has played out alongside steep gains for many other commodity-linked currencies.

But these factors have lifted model-derived estimates of “fair value” for the Rand and when combined with the high interest rates and bond yields in South Africa, not to mention relatively low rates of inflation, some analysts say they could lead to further gains for the currency later in the year. 

“Our PPP [purchasing power parity] model actually suggests that USD-ZAR could be lower without creating any valuation misalignment,” says Murat Toprak, a CEEMEA FX strategist at HSBC, who sees USD/ZAR at 13.70 by year-end. 

Above: USD/ZAR shown at weekly intervals with Fibonacci retracements of June 2021 uptrend indicating medium-term areas of technical support. Click image for closer inspection.