The Rand is Expected to Get Worse

As it stands South Africa’s rand is heading towards its worst week against the dollar since October. Amid rising political risks and concerns surrounding the country’s economic outlook, technical indicators show that more pain is on the way for the currency. 

The gross domestic product data that was released earlier this week showed that this is the worst quarterly performance that South Africa has experienced in the three months through March since 2009. 

The African National Congress is currently facing infighting within its party over the mandate of the country’s Reserve Bank, which aggravated losses, which is leaving investors questioning if President Cyril Ramaphosa has the support he needs in order to advance his reform agenda.

On top of this, state-owned companies like Eskom and South African Airways are back in the headlines, but for all the wrong reasons, which has added to investor worries. 

According to S&P Global Ratings, South Africa might not be able to continue supporting Eskom. The state-owned airline, which is currently leaderless is searching for a new chief executive as well as in discussion with the bank over their debt terms. 

On Friday, the rand fell by 1.2% and traded at 0.6% weaker at 15.0891 per dollar by midday in Johannesburg. The decline this week was then to 3.4%. 

Until real progress is made at implementing structural reforms, the South African economy will continue to have a weak underlying trend and the outlook of such will remain challenging. 

It looks like the rand does have space to fall, which is shown in the rand’s relative strength index. This is a momentum indicator that shows whether a currency is overbought or oversold. The measure is still lower than the 70 level, which would signal to some traders that the dollar is overbought. 

At 14.98, it breached the 75.4% Fibonacci retracement level and the rand may target the September high of 15.70. 

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