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  • Long USD / ZAR As Major Central Banks Reign In Stimulus: Top Fourth Quarter Trade

Long USD / ZAR As Major Central Banks Reign In Stimulus: Top Fourth Quarter Trade

By on October 9, 2021 0

{{GUIDES | TOP | See DailyFX’s best Q4 opportunities in our guide!}}

Central bank easing gathers momentum

Global central banks are no longer just talking about cutting stimulus buying and raising interest rates – some have already started to implement this. Here are some of the recent tweaks:

  • BCE – Reduction in monthly purchases of PEPP bonds
  • BdC – Reduced weekly net purchases of government bonds by C $ 1 billion
  • RBNZ – End of the bond purchase program induced by the pandemic in July 2021
  • Norges Bank – Due to an increase in interest rates in September 2021

Much of the appeal of ZAR this year has been focused on its attractive performance among its “riskier” peers in the rest of the Emerging Markets (EM) category. However, the trend is changing and South Africa’s attractive yield differential is likely to come under pressure as central banks in developed countries which are considered more secure – such as the central bank of Norway (Norges Bank) – are considering rate hikes in the coming months.

In addition, the US Federal Reserve is due to meet twice in the fourth quarter, where revelations about tapering are expected to dominate the main talking points.

Central banks take rate hikes into account

Source: Réfinitiv

South Africa’s bitter battle

South Africa’s economic outlook remains a challenge as the southern African country grapples with rising unemployment, sluggish GDP, lower commodity prices and slow adoption of Covid vaccinations.

Unemployment figures for the second quarter reached 34.4%, the highest figure since the start of the quarterly labor force survey in 2008.

SA’s GDP for the second quarter increased 1.2% from the first quarter and marks the fourth consecutive quarter of positive economic growth. However, the economy has not yet reached the pre-pandemic level and is currently equivalent to the same level as in the fourth quarter of 2017.

South Africa's GDP

Source: StatsSA

Vaccines in South Africa have been made available to anyone 18 and over since August, but only recently passed the 15 million mark. South Africa’s population is around 60 million, so there is still a long way to go before the economy fully opens up again.

Key techniques

USD / ZAR fell quite aggressively towards the 14.14 level which was always going to be a challenge for further selling as the level has proven to be a rather stable support level in the past. The large bullish engulfing candlestick (highlighted in yellow) really set the tone for the bullish reversal that gained momentum in subsequent trading sessions. The bullish momentum could be further fueled by weakening US speculation and the strength of the dollar that should follow as the end of the year approaches.

A pullback towards the 14.50 or even 14.40 level would not be unusual considering the rate of recent advance and near overbought conditions of the Stochastic Oscillator. 14.50 or 14.40 may offer opportunities to enter the new uptrend. A move supported above 14.65 opens the pair for a retest of 15.00 and above

USD / ZAR Daily Chart

USD / ZAR Daily Chart

Graphic prepared by Richard Snow, IG

{{GUIDES | TOP | See DailyFX’s top Q4 opportunities in our guide!}}

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