USDZAR: South African Rand Rally Sees No End

Summary:

The USDZAR pair is in a sharp downward trend as investors react to strong data from South Africa and the overall weaker US dollar

The USDZAR pair is in a steep downward trend as investors react to positive economic data from South Africa. The South African rand has gained for the past six consecutive days and is trading at the highest level since September 21^st.

Today, data from Markit and Standard Bank showed that the manufacturing sector in South Africa contracted at a slower rate in September. The PMI rose from 45.3 in August to 49.4 in September, the biggest monthly gain since June. A PMI reading below 50 is usually a sign that the sector is contracting.

According to Markit, companies in South Africa have started to report higher order flows. Also, the companies recorded higher output, employment, and stock of purchases data. This improvement comes at a time when the number of Covid-19 cases in South Africa has stabilised. As a result, the government has listed some travel and business restrictions.

However, the South African economy is not out of the woods yet. The country has continued to experience significant black-outs and more companies are in distress. In a statement, David Owen, an analyst at Markit said:

“Expansions in output and demand will be needed to help businesses revive job markets though, as employment continued to fall steeply. A rise in jobs will likely appear after an increase in economic activity, as firms will need time to recoup losses from the pandemic.”

The USDZAR is also falling because of the overall weaker US dollar. The dollar index, an important number that measures the strength of the greenback, is down by 0.22%. That is because, according to the latest information, Donald Trump is doing relatively well. As such, investors are winding-down their risk aversion trades on Friday.

USDZAR technical outlook

The daily chart below shows that the USDZAR has been in a strong downward trend starting from September 25, when it reached a high of 17.2590. Today, it reached an intraday low of 16.3746, which is the lowest level since September 22.

This level is notable since the pair has in the past found significant support in it. Also, it seems to be the neckline of the head and shoulders pattern. The price has moved below the 25-day and 15-day exponential moving average.

Therefore, the USD/ZAR pair is likely to continue falling as bears aim for the next support level at 16.06, which is the lowest level on 18^th September. On the flip side, a move above 16.78 will invalidate this trend. This price is along the 25-day and 15-day EMA.