The euro rallied early against the Rand but then gave back the gains as we approached the 50-day EMA.
EUR/ZAR
The euro initially rallied during trading on Wednesday but has run into a little bit of trouble at the 50-day EMA, just about a week after forming a potential double bottom at the 18.60 level. The bounce was fairly impressive, but as we hit the 50-day EMA, it's worth noting that the technical analysis suggested resistance, and we have in fact seen that there.
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The market is going to continue to be one that I think is a bit choppy, but the markets are also looking at the possibility of, in South Africa seeing interest rates on hold, although there have been a couple of members in the South African central bank vote for a rate hike. Most of the board did say that the policy was restrictive enough to return inflation to target within the next 2 years, and with the markets in South Africa dealing with retail sales coming out at 1.6% year-over-year, that does seem to be somewhat vindicated.
SARB Policy Outlook and Technical Inflection Levels
The problem, of course, is there's always somebody willing to fight the other fight, as it were. There are some analysts out there raising the possibility of a 25-basis point September rate hike to about 50/50, down from higher, but the South African Reserve Bank has oil at $100 or so to deal with, and of course inflation above 5% for an extended amount of time. That isn't necessarily an environment that's conducive to easy trading.
Ultimately, it does make a certain amount of sense that there is a little bit of downward pressure, as the South African rand offers more in the way of interest rates, and it's more about the carry trade at this point than anything else. And what could be interesting here is that some of the other carry trades, like against the Swiss franc, have unraveled a bit, and that could come into play here as well.
The euro area inflation near 3% is well above target, and markets are now trying to price in a 25-basis point rate hike in Europe as well. Ultimately, this could wash things out. If that's the case, it's very likely that with stable markets we go back towards the carry trade, meaning that the sellers would continue to be relevant here.
It is worth noting that at the 18.5 level, there is a major area of inflection. If we give that up, this could drop pretty significantly. If we turn around and break above the 50-day EMA, then the 19 level almost certainly will be the short-term target for buyers.
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