January 28, 2023

Long USD/ZAR as Major Central Banks Reign in Stimulus: Top Trade Q1 2022

Central Bank Tapering Gains Momentum

Global central banks are no longer just talking about reducing stimulatory purchases and raising interest rates – some have already started to put these words into action. Below are some of the recent adjustments:

  • ECB – Reducing monthly PEPP bond purchases
  • BoC – Reduced weekly net purchases of government bonds by C$1 billion
  • RBNZ – Halting pandemic induced bond buying program in July 2021
  • Norges Bank – Due to raise interest rates in September 2021

Central Banks Factoring in Rate Hikes

Source: Refinitiv

A lot of the ZAR appeal this year has centered around its attractive yield among its ‘riskier’ peers in the rest of the emerging market (EM) category. However, the tide is changing and South Africa’s attractive yield differential is likely to come under pressure as central banks in developed nations which are considered to be safer – like Norway’s central bank (Norges Bank) – consider rate hikes.

In addition, the US Federal Reserve Bank is scheduled to meet twice in Q4 when revelations around tapering are likely to dominate the talking points.

South Africa’s Uphill Battle

The economic outlook for SA remains a challenge as the southern-most African nation grapples with rising unemployment, sluggish GDP, lower commodity prices and a slow uptake in Covid vaccinations.

Long USD/ZAR as Major Central Banks Reign in Stimulus: Top Trade Q1 2022

Source: StatsSA

Unemployment figures for the second quarter reached 34.4%, the highest number since the Quarterly Labour Force Survey began in 2008. SA GDP for the second quarter rose 1.2% compared with Q1 and marks the fourth consecutive quarter of positive economic growth. However, the economy has not yet reached the pre-pandemic level and currently equates to the same level experienced in Q4 2017.

Vaccinations in South Africa have been made available to anyone 18 and older since August but only recently surpassed the 15 million mark. The South African population is around 60 million so there is still a long way to go before the economy is likely to fully reopen.

USD/ZAR Daily Chart

Long USD/ZAR as Major Central Banks Reign in Stimulus: Top Trade Q1 2022

Chart prepared by Richard Snow, IG

Key Technicals

USD/ZAR dropped aggressively towards the 14.14 level which was always going to pose a challenge to continued selling as the level proved to be a stable level of support in the past. The sizeable bullish engulfing candlestick (highlighted in yellow) set the tone for the bullish reversal which gained momentum over the following trading sessions. The upward momentum could be further fueled by US tapering speculation and dollar strength likely to follow into year’s end.

A pullback towards the 14.50 or even 14.40 level would not be unusual when considering the rate of the recent advance and near overbought conditions on the stochastic oscillator. 14.50 or 14.40 may provide opportunities to enter the fresh uptrend. A supported move above 14.65 opens up the pair for a re-test of 15.00 and higher.

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