Dollar weakens against Rand, but declines could be limited

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The South African Rand poses a steady challenge to the US dollar as prices continue to fall giving up most of the gains made earlier in August. Latest fundamentals hitting the wire included today’s headline inflation figures.

Data from Statistics South Africa showed that headline consumer inflation slowed to 5.90% on a year over year basis in August. It marked the lowest level of inflation in 9-months after slipping from 6.0% inflation seen in July. The headline figure was in line with estimates as far Reuters poll was concerned and also showed that inflation eased from the top end of the SARB’s inflation band of 3 – 6 percent.

South Africa CPI y/y (August 2016): 5.90% (Prev.: 6.05%)
South Africa CPI y/y (August 2016): 5.90% (Prev.: 6.05%)

On a month over month basis, inflation was down 0.10% in August after posting a 0.80% increase in July. Excluding food and energy prices, core inflation was unchanged at 5.70% on the year but rose only 0.20% on a month over month basis. This was slower than July’s core inflation reading of 0.60%.

On the fundamental landscape, despite some short-term hiccups, the rand has taken the third spot among other emerging market currencies, only next to the Brazilian real and the Russian ruble.

Moody’s: 50% chance of credit downgrade

Credit ratings downgrade has been the biggest issue facing investors as far as South Africa was concerned in lieu of economic stagnation and leadership crisis. However, there was some good news as Moody’s credit ratings said that the risk of a credit rating downgrade (to junk) is now 50%, a slightly better outlook than what was previously forecast. Moody’s further said this week that a ratings cut was likely if South Africa’s growth fell below 0.20% this year. This is somewhat good news considering that latest GDP figures released a month ago showed that second-quarter growth rebounded, rising 3.30% on the quarter, following a 1.20% contraction in Q1 this year.

Kristin Lindow, an analyst at Moody’s, told reports at a conference in Johannesburg that the ratings agency doesn’t expect an upgrade (to Baa2) in the near future. “Fundamentally because the rating has a negative outlook, we don’t expect that we would upgrade the rating in the near future,” Lindow said.

In its forecasts, the ratings agency said that it expects growth to rise 1.10$ in 2017and 2 percent after that.

Zuzana Brixiova told reports that with a negative outlook, the risk to ratings was tilted to the downside, but sounded optimistic in saying “But having said that … fundamentally we expect that the probability of a downgrade is less than 50 percent, it’s about one-third.”

USDZAR – Technical Outlook

Price action in USDZAR has been fairly limited since mid-August after the initial knee-jerk reaction to news about finance minister Pravin Gordhan being summoned for investigations into fraud allegations. The USDZAR rose to 14.73 and since then the dollar has been retreating lower. The lower high that formed near 14.38ZAR following the bounce of the 14.00ZAR handle resulted in price action making a lower high. A break below August lows of 13.25 – 13.50 could, however, put the dollar further into bearish territory.

USDZAR (13.74) – Price nearing support at 13.25 – 13.50
USDZAR (13.74) – Price nearing support at 13.25 – 13.50

Still, there is a chance that the dollar’s declines could be limited towards the 13.56 – 13.40 support level, which could mark a retest from the falling median line’s breakout level. The elusive higher low could be in the making.

FOMC meeting could determine dollar’s direction

The Federal Reserve meeting is scheduled later today at 1800GMT which could no doubt bring volatility to the markets. The emerging market currencies will obviously be feeling the heat of the decision. Market consensus expects no change to the Fed funds rate at today’s FOMC meeting which will be followed by a press conference. Still, there is a chance that the Fed will strike a hawkish tone in the markets in light of broadly upbeat economic data as far as inflation and unemployment are concerned.

For USDZAR watch for a possible higher low near 13.56 – 13.40 price zone for a reversal which could potentially indicate a new leg in the rally. To the upside, 14.00, 14.73 – 14.65 and 15.40 could be the likely levels of interest.

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