USD/ZAR near key technical level ahead of SARB

The South African Reserve Bank (SARB) meets tomorrow and is expected to increase interest rates by 50bps from 4.25% to 4.75%. The central bank has previous raised rates by 25bps at its last three meetings, bringing the key rate higher from the pandemic lows of 3.5%. In addition, at the last meeting, the central bank increased its inflation assessment for 2022, raising its outlook to 5.8% for the year from 4.9% in January. Earlier today, South Africa released its April CPI data. The headline print was in-line with estimates at 5.9% YoY, as the Core rate was higher than expectations of 3.8% YoY with an actual print of 3.9% YoY. In addition, South Africa released Retail Sales for March at -0.3% MoM vs an expectation of 1% MoM. The February print was revised lower from -0.5% MoM to – 2.0% MoM!

What are emerging markets?

Looking at USD/ZAR on a weekly timeframe shows that price is near a key level of the 50% retracement from the April 2020 highs to the June 2021 lows, near 16.3724. This is the second time price has approached this level, trading to 16.3643 in November 2021. The 50% retracement level has also acted as previous support during the summer of 2020 as USD/ZAR was pulling back from the pandemic highs.

Source: Tradingview, Stone X

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On a daily timeframe, after USD/ZAR reached the key resistance level on November 26^th, 2021, price moved lower to 14.3997 on March 31^st. Since then, price has retraced the entire move in an ascending wedge formation. Yesterday, USD/ZAR broke below the bottom, upward sloping trendline of the wedge and is currently testing the underside of the trendline. The expected target after the breakdown of an ascending wedge is a 100% retracement, or near 14.3602. Notice in the panel at the bottom that USD/ZAR and the US Dollar Index (DXY) are highly correlated with a correlation coefficient of +0.89. Readings above +0.80 are consider significant. Therefore, if the DXY moves in one direction, USD/ZAR should move in the same direction.

Source: Tradingview, Stone X

On a 240-minute timeframe, notice that the current correlation coefficient between USD/ZAR and the DXY is +0.95! For reference, a reading of +1.00 is a perfect positive correlation, in which both assets move in the same direction 100% of the time. +0.95 is pretty close! First resistance is at the bottom upward sloping trendline of the ascending wedge near 16.0993 and then a confluence of resistance at the recent high, the previously mentioned 50% Fibonacci retracement on the weekly timeframe and the highs from November 26^th, 2021 between 16.3222 and 16.3734. Above there, price can move to the 61.8% Fibonacci retracement on the longer timeframe at 17.0725 (see daily). First support is just below at 15.8829, which is the low from May 17^th. Below there, price can fall to the 61.8% Fibonacci retracement level from the low of April 13^th to the high of May 16^th at 15.6050, then the low of May 4^th at 15.4058, which is just above the 50% retracement from the same timeframe.

Source: Tradingview, Stone X

USD/ZAR is trading just below key long-term resistance. Can it break above it? If the SARB raises rates less than expected or if the statement is less hawkish than expected, the pair may break higher. In addition, given the strong correlation with the DXY on the daily and 240-minute timeframe, if the US Dollar breaks to new near-term highs, it could pull USD/ZAR along for the ride.

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