The South African rand has staged a strong comeback this week after last week’s coalition deal between ANC and Democratic Alliance. The USD/ZAR exchange rate has plunged to a low of 17.91, its lowest swing since August 2023. It has plunged by more than 7.5% from its highest point this year.
SARB rate cuts to be delayed
The biggest catalyst for the USD/ZAR pair was the decision by the ANC and DA party to form a coalition government. Analysts have cheered the fact that the political situation took a less period than expected.
The pair also tumbled after the latest South Africa inflation data. According to the statistics agency, the headline Consumer Price Index (CPI) rose to 5.2% on an annual basis, the same as in April.
The implication is that the South African Reserve Bank will maintain interest rates at a 15-year high of 8.25% for a while. In recent statements, the country’s central bank governor has insisted that inflation was not falling as much as he would want.
Therefore, with the elections being over, there is a likelihood that the SARB will decide to leave interest rates unchanged for a while. Analysts expect at least one cut this year. The next SARB decision will be in July.
This is the same view that analysts have about the Federal Reserve. In a statement last week, the bank left interest rates unchanged between 5.25% and 5.50%. The Fed noted that inflation is not falling at a fast pace, meaning that the bank will deliver at least one cut this year.
The implication of all this is that the interest rate differential has led to a good carry trade opportunity. Carry trade is where investors borrow from lower interest rate currencies and invest in higher rates ones like the rand.
USD/ZAR technical analysis
The USD to rand exchange rate has crashed hard in the past few weeks. It has recently dropped below the crucial support level at 18.12, its lowest swing in November and December last year.
The pair has also formed a death cross pattern where the 200-day and 50-day moving averages makes a bearish crossover. It has crashed below the 50% retracement point.
Therefore, there are signs that bears have prevailed, which could see it continue falling as sellers target the crucial support at 17.50.
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