Good day traders and welcome to another breakdown of USDZAR. Today, we’ll be taking a closer look at the fundamentals that coincide with the technicals that has been driving price downward.
On the weekly timeframe, there was an attempt at breaking the previous high of 19.33. A wick was left just short of that high and managed to close with a double top forming around 19.05. We printed a 3-pin pattern which went on to break the area of consolidation(18-19) at the highs. We can attribute this sharp move to the downside to the easing of lockdown regulations as South Africa lowered their restrictions from level 5 to level 4 on the 1st of May. As of today, we have tested the bodily closures from January 2016, which may form support.
Taking a closer look at the daily timeframe, we clearly see how we broke through the area of consolidation and continued to push price lower. As of the 1st of the June, the South African government further lowered lockdown restrictions from level 4 to level 3 which saw 8 million South Africans return to work. More businesses and companies opening nationwide is a huge boost for the economy as you can see with the strengthening of rand.
On the 4 hour timeframe we can see the perfect breakout, 21 May 03:00 (GMT +2) and retest of the consolidation at the highs. Since the start of the month, the rand has gained 840 pips versus the dollar. Added to the strengthening of the rand, the US-China tensions regarding trade seems to be escalating as well as the civil unrest regarding police brutality are both factors that are weighing down heavily on the dollar. Since printing a new low today as well as reaching the highs of January 2016, we may see a pullback before continuing lower. 17.00 will be a crucial level to cross for this retracement to occur.
Looking at the dollar index on the 1 hour, which is a measure of the US dollar’s value relative to the majority of it’s most significant trading partners, we can how since May 25, the dollar index fell 3.5% due to the reasons mentioned above as well as the ongoing impact of the coronavirus. The US-China trade war seems to be reaching boiling point as the Chinese government reportedly told state-owned agricultural firms to stop purchases of US soybeans which is one of the major US agricultural exports to China. This was in retaliation to the tariffs imposed by the US on China on $360bn worth of goods with a tariff of 15%. With less goods being exported by the US, not only to China but globally, we can see it’s having a negative impact on the dollar, aiding the strengthening of the rand in comparison.
Looking at USDZAR on the 1 hour we can see the downward momentum is evident on the lower timeframes as well. We had a clean break of 17, proving that bears are still in control of the market. Plotting the Fibonacci tool, we had a retest of the 17 region as well as a few spinning tops along with a bearish engulfing off the 61.8% level. With the ADP report coming out positive for the dollar, in total there was 2.76 million job losses reported where the expected figure was 9 million. Today’s NFP report will be a crucial factor to consider going into next week.
A longterm perspective on USDZAR is pointing towards a recovery to the levels we were trading at, at the beginning of the year around the 15 mark. If the South African government continues to lower lockdown restrictions, a recovery is a likely outcome. However, there are other factors to consider such as the outcome of the US-China trade war, which could bring positive news for the dollar if some sort of deal is made which would lead to a weakening of the rand in comparison. A strong second wave of coronavirus would have a devastating impact on the South African economy especially because the country’s medical system is not equipped enough to handle a nationwide spread of the virus which would take us right back into the highs.
From a more short term perspective, we could look at the highs of 2019 for a possible reversal around the 15.50 mark. We would however have to wait to see how all the above mentioned factors play out in order to know whether we are seeing a recovery or a pullback on USDZAR. As always trade safe and have a great week further. Subscribe to our blogs for direct access from your email.