The US dollar has rallied over the last couple of weeks against the South African rand an attempt to reach towards the 15.50 rand handle. This is an area where we have seen a lot of resistance previously, so it does make sense that we retest this area. It does not take too much in the way of imagination to suspect that there is a little bit of an inverse head and shoulders pattern forming. It does not necessarily mean that we are going to rocket to the upside, but if we can get at least a daily close above the 15.50 level, it is likely that we could go looking towards the 17 handle above.
Underneath, if we were to break down below the 13.50 rand level, we could get a little bit of a pullback towards the 13.50 rand as well. This would be a very pro-US dollar move, which does not look as likely in November as it once did, mainly because the US dollar has been getting beaten up across support, not just in emerging market currency such as this one. Keep in mind that South Africa is more of a “risk on market” in general, but there are also special things to consider when you are talking about some of these emerging market currencies, as a very significant problem that is unique to some of the smaller economies is the fact that the global supply chain has broken down. The market breaking to the upside here does not necessarily mean that the US dollar is going to take off against everything else, but it is worth noting that the USD/ZAR pair looks a lot like the USD/MXN pair, as both are forming some type of base. In other words, although the US dollar might be getting hit against some of the more commodity-related markets, South Africa has far too many other risks involved to think that we are suddenly going to break down here. With that in mind, I am paying very close attention to the 15.50 rand level for a potential bounce towards 17. On the other hand, breaking down below the 14.50 rand level would probably coincide with a major US dollar sell off globally. I am much more comfortable going long here than I am short, despite the fact that I am short the US dollar in other places.
