The South African rand is back. After soaring to 19 last week, the USD/ZAR pair has plummeted to 18.40 as investors focus on the coalition talks between the Africa National Congress (ANC) and the Democratic Alliance (DA).
Coalition talks advance
The USD/ZAR pair has been in the spotlight recently after the recent South African election in which the ruling ANC failed to win a majority for the first time in the post apartheid era.
In the aftermath, the two leading parties, ANC and DA, have been talking about forming a coalition government in which Ramaphosa will be the president.
Therefore, investors are assessing the implications of the new coalition government. Some believe that the business-friendly DA party will help to keep the ANC in check after years of mismanagement of the economy.
Still, coalition governments in most countries tend to have major issues. For example, in Kenya, the coalition government between Mwai Kibaki and Raila Odinga helped to slow the then economic growth.
Most recently, there have been issues in the German coalition government, which has continued to rank lower in the polls. The same issues have happened in Spain.
Also, it is unclear whether the policies by the new coalition government will have an immediate impact on the economy. In most cases, government policies take longer to have an impact.
At the same time, the South African central bank will likely stick to its policies in the coming meetings. Like other central banks, it has left interest rates unchanged as it battles the stubbornly high inflation. The most recent data showed that South Africa’s inflation slowed to 5.2% in April.
The USD/ZAR pair also crashed after the latest Federal Reserve decision. In it, the bank decided to leave interest rates unchanged. It also hinted that it would leave rates unchanged for a while and then deliver one cut this year.
The US dollar index (DXY), which tracks the greenback against a basket of currencies, rebounded after this hawkish decision. It has jumped to $105.30, its highest level since last Friday as it rose against other currencies.
USD/ZAR technical analysis
The USD to ZAR exchange rate has dropped sharply in the past few weeks. It has crashed from the year-to-date high of 19.38 to about 18.45. Also, the pair has crashed below the 50-day moving average, signaling that bears are taking over.
It has also dived below the 38.2% Fibonacci Retracement level. Therefore, the pair will likely continue falling as sellers target the key support at 18.12, its lowest swing in November and December last year.
The alternative scenario is where the South African rand plunges after the coalition deal is announced in a situation known as buying the rumour, and selling the news. If this happens, it will likely retest the resistance level at 19.
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