The US dollar has rallied quite nicely over the last few weeks, as the greenback has been on a tear overall. The South African rand continues to take it on the chin, which makes sense as it is an emerging market, and those all have struggled in this scenario. The supply chain issues have hit emerging markets quite hard, as they are so interconnected. If goods cannot get to the customer, it doesn’t help to be ‘waiting around’ like a lot of these commodity economies are.
Furthermore, the coronavirus pandemic has been particularly bad in South Africa. Adding more misery is the fact that the inoculations are being delayed, and this will continue to be an issue for this fragile economy. The Federal Reserve is in the process of tapering bond purchases, which in a sense is a type of monetary tightening, which tends to be particularly tough on these emerging market economies.
From a charting standpoint, you can see on the chart that I have drawn out a nice, inverted head and shoulders pattern. The pattern took a while to break, but once it did – the markets really took off. The ‘measured move’, when you take the projected possible target, suggests that 17.50 rand could be the target longer-term. Obviously, this is a target that will take a bit of work to get to, and I think that the majority of this next month will play out that way. I will be a buyer of dips, looking at them as potential value plays. The neckline was at 15.50, so it’s been only recently that we have escaped that pattern.
The market will be bullish until we break below 15 rand, as this would negate the pattern. The US dollar is going to be thought of as a safety currency in this pair, and as the USD rallied against many of the majors, this will be even more so against smaller currencies such as this one. Remember, these emerging market currencies tend to be a bit localized, so the vaccination news will also have to be closely followed in places like Johannesburg, Cape Town, and Pretoria. I believe that the month should continue to be good for the US dollar, and this market will be no different. That being said, I am not so sure 17.50 will get hit in the next month. That is probably a story for January.
