The South African rand has softened a bit recently, joining other emerging market currencies like the Turkish lira and the Chinese yuan. The USD/ZAR exchange rate was trading at 18, up by 5.86% from its lowest level this year.
South Africa’s potential political crisis
The USD/ZAR pair has bounced back recently as concerns about the political situation deteriorated slightly.
In a recent statement, the Democratic Alliance party warned that it may leave the government if Cyril Ramaphosa fires the Minister of Education, Siviwe Gwarube.
The recent crisis started a few months ago after the two parties differed sharply on the Basic Education Laws Amendment Bill. While the two sides ironed out the issues and the president signed it into law, tensions have remained.
Therefore, there is a risk that the two parties will ultimately fall out as many coalition governments do. A good example of this is what is happening in France and Germany. The French government has collapsed, while the German coalition is on shaky grounds.
A collapse of the South African government would have some serious consequences in the long term. Besides, it is unclear which other party the Africa National Congress (ANC) would work with in the country.
The coalition government has brought substantial stability in the South African economy, attracting positive reviews from rating agencies like Moody’s and Fitch. Business and consumer confidence have rebounded, and the economy is on a road to recovery.
Also, the perennial power crisis that has affected the country has improved in the past few months. As such, a political crisis would likely undo all the good things that have happened after the last general election.
Geopolitical risks and the Fed
The USD/ZAR pair has rallied as many emerging markets prepare for the new Donald Trump administration.
Trump has pledged to implement large tariffs on imports, especially from countries like China, Mexico, and Canada.
He may also implement some tariffs or even sanctions on South Africa for its lawsuit against Israel.
Therefore, most emerging market currencies like the Chinese yuan and Brazilian real have all retreated amid these geopolitical concerns.
The USD/ZAR exchange rate has also jumped because of the rising hopes that the Federal Reserve will be more hawkish in the coming meetings. Recent statements by officials have confirmed that the bank plans to embrace a more gradual phase of cutting rates.
Therefore, analysts expect that the Fed will cut rates by 0.25% in the next meeting and then embrace a strategic pause. Currencies like the South African rand often drop when the US dollar index is strong.
The USD/ZAR pair also retreated after the South African Reserve Bank (SARB) delivered a 0.25% rate cut in its November meeting. It has now slashed rates by 0.50%, and the bank has hinted that this trend will continue in the coming meetings.
USD/ZAR technical analysis
The daily chart shows that the USD to ZAR exchange rate has been in a tight range in the past few days. It was trading at 18, higher than the year-to-date low of 17.
The pair has moved above the 50-day and 100-day Exponential Moving Averages (EMA). It has also formed a bullish pennant chart pattern, which is made up of a vertical line and a symmetrical triangle pattern.
Therefore, there is a likelihood that the pair will have a strong bullish breakout in the next few days. If this happens, the next point to watch will be at 18.67, its highest level on August 5. The stop-loss of this trade will be at 17.8.
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