Ultimately, we have seen the U.S. dollar rise over the last several weeks, as the war continues to be a major driver of risk appetite.
USD/ZAR
The U.S. dollar has been all over the place during the trading session on Tuesday against the South African rand, which of course is a market that has been choppy to say the least.
As we look ahead to the next session, the Federal Reserve does have an interest rate decision. It is not expected to be a change, but the question will be whether or not the dot plot changes or maybe the statement changes. The press conference of course will be important as well.
Ultimately, we have seen the U.S. dollar rise a bit in more of a risk-off type of trade. From a technical analysis standpoint, it is interesting that the 200-day EMA is sitting near the large round psychologically significant figure of 17. From this point in time, I think still faces quite a bit of headwinds, but we have a lot of different things going on outside of this pair that you have to be aware of.
Geopolitical Concerns and Interest Rate Differentials
If I was just looking at the chart then yes, I would want to fade short-term rallies, but with the FOMC, you will get some volatility and therefore you have to be cautious. There are geopolitical concerns and that does tend to help the U.S. dollar.
However, the South African inflation is currently around 3.5% and now it could spike towards 4%. That means that there is a pause in any plans for the South African Reserve Bank to continue rate cutting from the current 6.75%. In other words, the interest rate differential should continue to pay you to the downside in this pair as domestic growth is resilient in South Africa at 1.1% GDP growth.
This is cautiously optimistic regarding ongoing energy and logistics reforms, but the current conflict does of course continue to threaten momentum from that. It is basically a situation where the rand is trapped between improving domestic fundamentals, better energy reliability for example, and a deteriorating global risk environment, ironically also energy.
Investors are currently favoring the U.S. dollar as a little bit of a safe haven, but you pay to do that. Quite frankly, if this breaks out to the upside, I will probably buy the dollar somewhere else.