This trade will simply be a “risk on/risk off” type of scenario for the next month or so, which could become quite interesting.
The US dollar has rallied significantly during the month of September against the South African rand, setting up a potential attempt to break out above a resistance barrier in the form of 15.50 rand. This is an area that has been important multiple times over the last year or so, and therefore it is most certainly worth paying close attention to.
Keep in mind that the US dollar is starting to enjoy higher yields, and that does make the currency more attractive. However, in this scenario I think that the perceived safety of the US dollar is also driving this pair higher, as the South African Rand is most certainly considered to be a “risky currency”, as it is an emerging market. On the chart, I have the Fibonacci retracement tool drawn, and the 38.2% Fibonacci retracement level is sitting just above the crucial 15.50 level. The chart also has the one, two, and three year moving averages plotted, all of which are starting to turn to the upside as well. All of this being equal, we could see this market take off, and I do think that if we clear the 15.50 Rand level, the market should continue to go much higher.
This is very likely going to be a good barometer of what is going on with risk appetite around the world. Quite frankly, South Africa has its own issues, but at the end of the day it is likely that we will see the South African Rand get pummeled if there is a lot of fear out there. At this point, we have made a significant pullback, but we have not been able to break out. I suspect that the month of October might give us a lot of clarity. If we fail at the 15.50 Rand level, then I anticipate a retest of the 14.25 Rand level where we had bounced from recently.
Much of this will come down to the supply chain issues, the Delta variant, and everything else going on around the world right now. While South Africa is not necessarily an energy exporter, it does tend to move along with commodities overall, as they do export certain hard commodities. With this, this trade will simply be a “risk on/risk off” type of scenario for the next month or so, which could become quite interesting.