The USD/ZAR exchange rate has pulled back in the past few months and is hovering near its lowest level this year. It was trading at 17.16, a few points above the year-to-date low of 17. It remains down by over 14% below its highest level this year.
Why the South African rand is rising
The USD/ZAR exchange rate remains under pressure this year as the South African rand has become one of the best-performing currencies in the emerging markets.
It has done well because of the ongoing stability of the South African economy. Recent data showed that the economy is expected to rebound by 1.1% this year, helped by the agricultural, mining, and manufacturing sectors.
The country has also benefited from the ongoing performance of key commodities like gold, platinum, and palladium, which have soared this year. Gold has jumped to a record high, and analysts anticipate more growth ahead.
Similarly, platinum and palladium prices have also jumped to their multi-year highs. This is notable as South Africa is one of the biggest producers of these metals.
The manufacturing sector has also done well despite the worsening relationship with the United States, one of its top trading partners. A recent report by S&P Global showed that the manufacturing PMI retreated slightly to 49.2 in October from 50.8 in September.
Goldman Sachs expects South African upgrade
The USD/ZAR exchange rate has pulled back as analysts at Goldman Sachs predicted that the country will receive a credit rating upgrade after the budget reading. It will receive an upgrade from S&P Global Ratings, which will release its report on the country later this week.
A rating upgrade will be important for the country as it will mark a sign of confidence in the economy. It will also signal growing confidence in its fiscal consolidation efforts, which have been characterized by large deficits and bailouts for state-owned firms.
In recent statements, agencies like Fitch, Moody’s, and S&P Global have highlighted three key things that need to happen for a credit rate upgrade to happen. These include more fiscal consolidation, no more bailouts, and economic growth.
The USD/ZAR exchange rate has also dropped because of its role as a carry trade currency. It has become a carry trade because South African interest rates stands at 7% compared to between 3.75% and 4%. As such, it has become common for investors to borrow US dollars and invest in South African assets.
USD/ZAR technical analysis
The daily timeframe chart shows that the USD/ZAR exchange rate has come under pressure this year. It dropped from a high of 19.92 in January to the current 17.14.
The pair is hovering slightly above the key support level at 17, where it has failed to move below this year. This price is below all moving averages and the Supertrend indicator.
Therefore, the most likely scenario is where it continues falling in the near term. This view will be confirmed if the pair moves below the support at 17.10. A move below that level will point to more downside, potentially to 16.
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