South African Rand Trader Sees Risk of Corrective Rebound Ahead

• USD/ZAR elevated near 2022 highs but rally slowing
• ZAR steadier on feet with RMB declines petering out
• ZAR losses "overdone," may be followed by rebound 
• USD & RMB trend in focus as U.S. PCE data looms

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The South African Rand was trading near its 2022 low in the midweek session following its largest weekly fall since March 2020 but one trader at Credit Suisse says the sell-off looks “overdone” and that it could soon be followed by a corrective fall in USD/ZAR. 

South Africa’s Rand was close to the biggest faller in the G20 currency complex during the week to Wednesday after being outdone in its decline by only the Brazilian Real, with a multitude of headwinds cited for the crushing losses.

“The rapid move should be regarded within the context of the rand’s earlier strong performance. Growth worries and global monetary policy are headwinds, but commodity prices remain supportive,” says Tilmann Kolb, an analyst at UBS Global Wealth Management.  

Volatile international stock markets and rallying energy prices are one set of reasons for why the Rand languished near the year’s lows on Wednesday but recent losses were almost certainly also connected to strength in the U.S. Dollar and a sudden fall by the Chinese Renminbi.

The Renminbi tumbled following an almost two year rally and as another wave of coronavirus containment measures threatens the Chinese economy. 

Above: USD/ZAR at daily intervals with Fibonacci retracements of November fall indicating possible areas of short-term technical resistance to any further rally, and shown alongside Dollar-Renminbi rate. Click image for closer inspection. 

“It seems likely that Covid lockdowns led to a deterioration in the trade balance this month. We should see that data come in over the next week or so,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“We know from looking at the FX settlement and sales data that non-resident investors have been trimming their exposure to RMB portfolio investment assets,” Gallo and colleagues said in a Tuesday podcast. 

The Dollar-Renminbi rate rose briefly above 6.60, leading to sharp declines for many correlated currencies including those in the emerging market sphere before administrative actions from the People’s Bank of China (PBoC) appeared to stem the decline this Monday. (Set your FX rate alert here).

It’s notable, however, that since Monday the Rand's fall has also come close to a halt in a tentative indication of that sell-off having run its course too.

Above: USD/ZAR shown at weekly intervals alongside USD/CNH. Click image for closer inspection. 

"Yesterday, China’s President Xi Jinping committed to boost fiscal spending on infrastructure and the PBoC pledged to increase monetary policy support through targeted financing for small businesses," says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia. 

The recent rally in USD/ZAR has lifted the Pound to Rand exchange rate sharply too and despite a widespread underperformance by Sterling relative to other major currencies, although the GBP/ZAR pair has been unable to overcome an important technical resistance level around 20.2608 on the charts.

“In my view, the move in USD/ZAR is overdone. The short USD/ZAR positioning has been unwound on the recent 14.40-15.74 rapid move,” writes Yuliya Kryzhanaovska, a trader at Credit Suisse. 

“Usually large moves of ~10% in USD/ZAR tend to be followed by a technical correction. Expect USD/ZAR to pull-back from the current stretched levels,” Kryzhanaovska also said in a Tuesday market commentary.

Above: GBP/ZAR at daily intervals with Fibonacci retracements of 2022 decline indicating possible areas of short-term technical resistance. Click image for closer inspection. 

South African markets were closed on Wednesday for the public holiday celebration of Freedom Day but the Rand will likely be sensitive over the remainder of the week to the trend in the U.S. Dollar and Chinese Renminbi. 

That leaves Friday’s release of the core PCE price index in the U.S. as the highlight of the remaining week with financial markets likely looking to see if last month’s slip lower in the core inflation rate was repeated in April. 

To the extent that it is, it could have implications for the Federal Reserve (Fed) policy outlook and would potentially dampen appetite for the Dollar.

“The sell-off was driven by a plethora of global and local factors. From the local end, floods and news on potential blackouts weighed on growth prospects, while global pressure on commodity currencies added to ZAR weakness,” says Marek Raczko, an FX strategist at Barclays. 

“We still see upside to ZAR in the medium term, and current depressed ZAR levels look attractive, in our view,” Raczko also said on Monday.