- The US dollar strengthened against the South African rand on Thursday, testing resistance near the 50-day EMA around 17.38.
- Despite renewed dollar strength following the FOMC meeting, interest rate differentials still favor fading rallies in USD/ZAR toward the 17.50 level.
The US dollar has rallied against the South African rand during Thursday trading as it looks like the market is trying to challenge the 50-day EMA. The 50-day EMA is found at the 17.38 level and is dropping. It’s been a little bit of a trend line, and I think that tells us that perhaps there is a lot of technical resistance between there and the 17.50 level, which had previously been support.
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There is an interest rate differential between these two currencies, as the benchmark rate in the United States is 4.25% and in South Africa, the key rate is 7%. So, having said that, you do get paid to be short of this market, and that’s part of what’s been driving it for a while, as we have just drifted lower. However, during the Wednesday FOMC press conference, Jerome Powell explicitly stated that an interest rate cut in December is not a given, and that has people piling back into the US dollar.
Trend Change? Not Yet.
While I don’t necessarily see a trend change in this pair at the moment, I think it does suggest that we have plenty of fight in the US dollar. And while it levitates against other currencies, the South African rand does pay you to hold it. So, unless things get really dire in a massive risk-off type of environment, I think you continue to fade this pair.
In fact, it’s one of the few that I prefer to fade rallies in when it comes to holding the US dollar. Quite frankly, I think the US dollar will continue to beat up on the other major currencies around the world, but some of these exotic highflyers, such as the South African rand and Mexican peso, may be somewhat insulated, at least unless we get some type of major risk-off event, which, let’s face it, is very possible at this point in time. I believe that the 17.50 ZAR level could end up being a significant barrier that will be difficult to overcome.
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