Emerging Market FX Weekly Pick: USDZAR

by on February 27, 2014 3:27 am GMT

The South African rand fell after the growth outlook has been slashed, and the Finance Minister Pravin Gordhan said that public debt is most likely going to increase over the next few years. Growth expansion is expected to hit 2.7 percent according to the Treasury, down from original forecasts of three percent. “The lower growth forecast for this year and the tighter fiscals imply that more of the burden for growth stimulation will fall on the central bank,” said Abbas Ameli-Renani, emerging market strategist at Royal Bank of Scotland PLC.

South Africa’s growth expansion has been limited and in a downward trend, although higher from the sub-two percent growth seen in 2009 and 2010. The rand could suffer as public debt is expected to grow 2.5 percent over the next three-years to 48.5 percent of gross domestic product. This could result in a credit rating downgrade, which has already been downgraded three times between 2012 and 2013. A few months ago, the rand see a heavy sell-off as a result of a bond sell -off in fears of the Federal Reserve’s initial asset purchase taper. A similar situation could present itself is government debt falls out of favor.

The USDZAR bounced off support at 10.70 as the dollar seen some bullish action after the positive new home sales data released on Wednesday, and price action was able to find support both on the 20 EMA and atop of the precious descending trend line extending from the high of 11.3883 made on January 30.

The volatile pair is likely to find more upside if the US dollar sees some strength on Thursday. Unemployment claims data is likely to come inline, or neutral, while core durable orders are expected to come in at a decline of .1 percent. A surprise to the upside is likely to send the dollar higher.

Also, Federal Reserve chair Janet Yellen testifies again, and the dollar could find some support. Yellen is likely to reiterate that the taper will continue despite recent economic data, which will bode well for the greenback.

Look for USDZAR to test resistance, and the 200 EMA on the 4H chart, at 10.8696, and potentially 10.9269. Over the next several sessions, the USDZAR could be sent back above 11 rand per dollar. 11.0307 is targeted using price action resistance and a secondary descending trend line from the 90-day, 4H chart high.

Support levels, if the dollar weakens, are found at 10.7, 10.6360 and 10.5370.

4H Chart of USDZAR

4H Chart of USDZAR