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South African rand recovers on a weaker USD and better Q2 GDP results

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The South African rand was seen regaining lost ground as prices quickly reversed the losses from the previous week. The South African rand initially weakened after reports emerged in late August about the investigations into the Finance Minister Pravin Gordhan’s dealings as a tax chief previously. The ZAR fell on the news and extended its declines as the US dollar gained over 10% since mid-August this year.

On Tuesday, latest GDP reports from South Africa showed that the economy expanded at a pace of 3.30% in the second quarter. Most of the gains were seen coming from increased manufacturing activity and a recovery in the mining sector. The quarterly GDP report was strong and marked the biggest increase since Q4 2014 GDP and also showed a recovery after the first quarter GDP in 2016 showed a contraction of 1.20% in the economy. On a year over basis, South Africa’s GDP expanded 0.60% in Q2 2016.

South Africa Quarterly GDP Growth Rate: 3.30% (Q2 2016). (Prev.: -1.20%, Q1 2016)
South Africa Quarterly GDP Growth Rate: 3.30% (Q2 2016). (Prev.: -1.20%, Q1 2016)

Manufacturing sector recorded an 8.10% increase contributing nearly 1.0% to the overall GDP growth, data from the statistics office showed on Tuesday. Production of petroleum and chemicals including cars and other transportation equipment also fared better. The mining sector also expanded, adding 0.8 percentage points as income in the sector rose by 11.80%.

The better than expected results helped the ZAR to maintain its gains as USDZAR reversed off 14.65 – 14.73 price zone which is seen as a resistance level. The ZAR also got some help from a weaker US dollar which has been falling steadily since the first of September with the losses seen accelerating after a weaker August payrolls report and weak ISM manufacturing and non-manufacturing PMI reports.

At the time of writing USDZAR is seen trading near 13.99.

SARB September monetary policy meeting

Interestingly, the South African Reserve bank will be meeting on September 22, just a day after the FOMC meeting concludes. At its previous meeting, the SARB lowered its growth forecasts for 2016 to zero, from previously projected 0.60%. With better than expected GDP numbers and higher inflation, the SARB could very well be seen coming out hawkish, without ruling out a possibility for a rate hike taking the repo rate beyond the current 7%.

However, in the event of a Fed rate hike or simply the uncertainty surrounding the path of the Fed rate hike cycle could mean that the SARB could stand pat on policy on increasing external financing costs. Commerzbank, in a research report, notes that even if the country’s current account deficit falls to 5% of its GDP from the current 6.80%, it is primarily due to a decline in imports which could give early signals of financing issues. Commerzbank concludes that the extremely high volatility in the USDZAR signifies that foreign investors are not quite attracted towards South Africa.

“We, therefore, see the risk that ZAR will continue to depreciate against USD over the coming months and to a lesser extent also against EUR. We expect USDZAR rates at 15.20 by the end of 2016,” Commerzbank forecasts.

Besides the financial conditions, the country continues to be engulfed in political uncertainty. Latest reports from South Africa showed divisions within the ruling ANC party.

Reports cited that on Monday hundreds of ANC workers protested calling for President Zuma’s resignation following reports of continued corruption scandals that has engulfing the ruling party.

USDZAR – Watch for a higher low

The technical chart for USDZAR shows the pattern where following the strong rally in the currency pair, the price hit the resistance neat 14.73 – 14.65 and reversed strongly. The current declines are seen retesting the breakout from the falling median line and comes after the hidden bearish divergence that is seen on the chart.

We expect a higher low to form somewhere around 14.00 – 13.56 following which further upside could resume. A breakout from the resistance at 14.00 – 13.56 could be followed by 15.63 – 15.42. The bullish bias would, however, be invalidated on a lower close below 13.15.

USDZAR watch for a higher low in price
USDZAR watch for a higher low in price
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