- Pre-election stimulus package remains a possibility
- USD/ZAR falling wedge formation supports further downside
- Accommodative global risk-on outlook
President Donald Trump has put revised US stimulus hopes back on the table with comments that he may go against members of the Republican party which could cause internal difficulties. Senate Majority Leader Mitch McConnell has disclosed the fact that he has advised against concluding a deal with House Speaker Nancy Pelosi before the November 3 elections.
A pre-election relief package could support further Rand strength but a failure to do so may see short-term Rand weakness as election jitters set in. The US Dollar and other traditional safe-haven counterparts may see increased action with rising volatility expected over the next few weeks.
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USD/ZAR TECHNICAL ANALYSIS
USD/ZAR weekly chart:
Chart prepared by Warren Venketas, IG
The weekly chart below exhibits a textbook falling wedge formation which is suggestive of a bullish (upward) continuation. Currently USD/ZAR remains within the wedge itself which could see further ZAR strength toward wedge support before price pushes higher – as the formation implies.
( 15:10 GMT )
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Weekly Stock Market Outlook
USD/ZAR daily chart:
Chart prepared by Warren Venketas, IG
The daily chart highlights significant support (green) between the 16.3444 38.2% Fibonacci level and 16.5000 psychological level since early June. While price has been testing these levels over Q3 and Q4, market participants are waiting for a bigger push away from the recent sideways consolidation. A favorable stimulus decision for the Rand may see the 16.0835 being tested as initial support if the 16.3444 38.2% Fibonacci level is broken.
USD/ZAR bulls will target the 16.7199 (blue) as the recent swing high in the event that the stimulus package is not passed prior to November 3.
DOMESTIC FACTORS AFFECTING THE RAND
With no significant news or events this week, the Rand has been at the mercy of global influences and risk sentiment. A steady appreciation of the Rand has continued yet still fluctuates around the 16.5000 key horizontal level. Attention will be focused globally for the remainder of the week with a close eye on the US coronavirus relief package negotiations.
Next week holds several key announcements for the Emerging Market (EM) currency with unemployment, inflation data and Finance Minister Tito Mboweni’s Medium Term Budget Speech (MTBS) being the main attractions. Although these events are likely to cause some change in ZAR crosses, global factors will remain the primary price change driver for the local currency.
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USD/ZAR: KEY POINTS TO CONSIDER MOVING FORWARD
The Rand remains favorable to global investors as it endures as an attractive carry relative to more developed economy currencies. Local bond markets mirror this with yields on both the R2023 and R2030 remaining extremely attractive for high-yield seeking investors respectively. Most market participants are positioned for further ZAR strength toward the 15.5000 – 16.0000 zone after which I believe positioning will be reviewed. The undervalued nature of the Rand (according to the Purchasing Power Parity model) encourages possible longer-term strength.
Uncertainty around the US stimulus package is the main factor concerning EM currencies so any certainty around negotiations will likely give the USD/ZAR pair a short-term directional bias. Key points to consider:
- US stimulus negotiations
- Falling wedge pattern
- Expected rise in volatility
- Next week’s South African data
— Written by Warren Venketas for DailyFX.com
Contact and follow Warren on Twitter: @WVenketas