The USD, could be on the verge of a major reversal to the upside against the ZAR. Our view of the fundamentals, sentiment and key technical levels to watch below.
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Interest Rate Differential to Narrow
The interest rate differential has supported the Rand but the gap is now likely to narrow as the Fed hikes rates to combat inflation which will narrow the gap between US and South African rates. Another bigger negative for the Rand and all commodity currencies is contracting global growth.
Commodity Sell Off to Send ZAR Lower
The global economy is slowing and we have a big sell off in commodities which we can see on the charts below. The commodity sell off looks set to continue and hurt the Rand longer term.
South Africa has major exposure to China and the Chinese economy was slowing even before COVID lockdowns and looks set to slow further.
As we have noted in previous articles, the market does not think the slow up in the global
economy will become a recession but leading economic indicators point to one coming this year. Also if we get a big sell off in stock markets this will weigh on the Rand as the USD gains on its safe haven status.
Sentiment
Large speculative hedge funds remain heavily long the Rand having their largest net long position since 2017 and we think this position could get hit on stop and trigger a major rally in USD/ZAR. The bullish fundamentals have peaked for the Rand and we expect the large speculative position to exit on stop and lead to a major rally in the USD.
Technical Analysis
The key technical levels of support and resistance to look out for are on the charts below.
