I Am Long USD/ZAR And Expecting A Level Of 12.878

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Includes: EZA
by: Discount Fountain

Summary

I am long USD/ZAR via a limit order, with entry at a level of 12.626 and a take profit level of 12.878.

While the rand is currently appreciating against the dollar, I see this as being driven by technical rather than fundamental factors.

In this regard, I expect the USD to continue to strengthen as an interest rate rise continues to fuel dollar demand.

I have previously argued that the South African rand is set to depreciate further owing to lower economic growth forecasts as a result of power shortages, coupled with lower commodity exports to Europe and China. Moreover, with U.S. interest rates now set to rise imminently, it is likely that we will see an outflow from riskier currencies into the U.S. dollar as a result of a higher rate.

In this regard, I am long USD/ZAR via a limit order, with entry at a level of 12.626 and a take profit level of 12.878. Additionally, I have a stop loss set at 12.373 which would only materialize if the trade becomes active once the 12.626 level is breached to the upside.

However, in spite of my prior macroeconomic forecasts, the USD has steadily been moving downwards against the ZAR. Since I placed a limit order for a long position on the USD/ZAR on June 8, we have seen the currency move down from a level of 12.57 to approximately 12.31 at the time of writing. While use of a limit order shields any loss since the trade did not activate, why is the ZAR moving upward and will this trend continue?

On a technical level, the Relative Strength Index for the currency pair stood at above a level of 70 on June 8, implying that the USD is overbought relative to the ZAR. Moreover, the South African central bank had recently hinted that an interest rate rise could be on the cards in the coming months, up by a potential 25 basis points from the current 5.75 percent cash rate. Given that energy costs are increasing and a weaker rand is fuelling inflation in South Africa, rates may well have to rise to keep prices at a sustainable level.

However, in spite of a broad gain in the ZAR this week, I still see this as a temporary fluctuation. Even if interest rates are anticipated to rise in South Africa, the likelihood still remains that demand for U.S. dollars will continue to increase as the rand is still seen as a risky proposition even with a higher relative rate. Moreover, macroeconomic factors in South Africa have not shown significant sign of improvement, and an uptick in the ZAR seems to be driven more by technicals rather than fundamentals.

Given the above, I still maintain a long position on the USD/ZAR with a 1-month time horizon, and expect that stronger macroeconomic fundamentals will come to drive the USD higher against the ZAR before the end of this month.

Disclosure: The author is long USD/ZAR VIA A LIMIT ORDER.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.