The South African Rand hasn’t done well since the start of the year and it’s now one of the world’s worst performing currencies in 2018. It is now down almost 10% with the USD/ZAR exchange rate reaching new highs after it touched 14.1446 earlier in the year. All emerging markets have been hit hard in the last couple of months. Especially at the beginning of August as the spillover effects caused by the US imposed tariffs on several trade partners such as China, Turkey, and Russia, have reached a new level of aggressiveness.
The emerging market risk-oriented assets have the closest connection to risk trends. Investors are going to flee relatively high-risk currencies, even if it is a high-yield investment. In this regard, even though the US hasn’t enacted new sanction on South Africa, the current market uncertainty should keep investors on their toes.
On March 8, the US President Donald Trump imposed a 10% tariff on aluminum imports coming from South Africa and a 25% tariff on steel imports. It’s no surprise that the USD/ZAR exchange rate found a bottom around that time and it never looked back. This was a major catalyst for the South African Rand’s depreciation.
The USD/ZAR exchange rate is also very sensitive to any negative influences that come from other major emerging markets. After the US administration doubled its metal tariffs on Turkey in mid-August 2018 and sent the Turkish Lira to an all-time low, we saw the spillover effect on the Rand exchange rate which also had the fundamental motive to break to new lows.
The South African economy is in a risky situation because the current state of affairs can quickly escalate to create more risky scenarios. The unpredictability, which the markets don’t like, around the US president Donald Trump makes the current macro trend so much harder to gauge. This bears a lot of risk throughout the rest of the world and especially towards the emerging markets.
Commodity Price Influences and USD/ZAR Technical Pattern
Lower commodity prices and especially lower Gold prices make the negative outlook for the South African Rand very dire. Commodity exporting countries, such as South Africa, face big trade fluctuations which cause significant volatility in their currency exchange rate. South Africa is the second largest producer of gold; so naturally, Gold prices tend to have a big impact on the Rand’s performance.
The natural relationship between the Gold price and the USD/ZAR exchange rate is that of an inverse correlation. When the USD/ZAR exchange rate is moving upwards, we should expect the Gold price to move lower. In other words, if Gold depreciates in value, the South African Rand loses its value. This relationship is highlighted in the figure below:
The USD/ZAR technical pattern remains bullish in the long-term so this adds another reason for not buying the South African Rand. The break above 13.9933 it looks like a good technical progression and a high probability trend development, but in order for the upside to open up more, we need to clear another important technical level – namely the 2017 high found at 14.5722 as this will suggest a much stronger trend is in sight.
Buying the South African Rand and respectively selling the USD/ZAR currency pair is a dangerous proposition taking into consideration the current macro forces that are behind the bullish trend. The technical pattern also confirms the fundamentals so fighting the trend is a losing proposition at this point in time. The USD/ZAR outlook can only turn bearish if we get a technical close below the 12.8000 level and a more favorable macro trend that can benefit the Rand.