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Q4 economic contraction, budget deficit keeps Rand weak

Disappointment over less hawkish tone of the US Fed kept the Greenback in a downtrend against its rivals for the past two weeks.

One of the currencies which gained in a notable manner is the South African Rand. From a high of 13.1512, the USD/ZAR pair had fallen to a low of 12.3951. The South Africa’s inflation rate of 6.3%, the lowest since September 2016, also contributed to the USD/ZAR’s decline. However, we believe that the downtrend is over for the time being due to the reasons mentioned below.

The marginal y-o-y decline in inflation has brought down the price of food prices in South Africa.

However, there are several lingering issues which are yet to be resolved. In the quarter ended December 2016, the economy contracted 0.3% y-o-y, compared with 0.4% expansion in the previous quarter. Analysts had expected a GDP growth of 0.5%.

Standard Bank Group

The primary sector, which includes mining, raw material production, and manufacturing, continues to struggle with a 9% y-o-y contraction. Diamonds and other precious metals production no longer generate reasonable wealth. StatSA reported 1.8% y-o-y decline in the secondary sector. Even farming contracted 0.1% in 2016. The budget deficit is now 1.7% of GDP. The nation also stares at the possibility of a credit downgrade. Thus, any recovery in the South African Rand would be temporary at this point in time.

On the contrary, the economic data from the US continues to remain strong and point to a firm recovery. New home sales increased to a seven month high of 592,000 in February, from 558,000 in the previous month and above analysts’ expectation of 566,000.

In this regard, John Higgins, currency strategist at Capital Economics, stated that the weakness seen in the Greenback is only temporary and the loose monetary policies in other developed economies would propel the US dollar soon. Thus, fundamentally, we forecast a bullish reversal in the USD/ZAR pair.

The price chart indicates support for the USD/ZAR pair at 12.42. The stochastic oscillator is just out of the oversold region. The CCI indicator has also crossed above the reading of -100. The price has also formed a bullish railway track pattern (circled in blue color). Thus, a bullish reversal can be expected at any time.

USD/ZAR Pair: March 27th 2017

USD/ZAR Pair: March 27th 2017

On the basis of forecasted uptrend, a currency trader can take a long position in the USD/ZAR pair near 12.4250. To improve the risk to reward ratio, a stop loss order can be placed below 12.35. Profit for the trade can be booked near 12.75.

Among various contracts offered by a binary broker, a high or above option can be picked to speculate on the uptrend. An investment in a call option equivalent contract can be made as long as the pair trades near 12.4250 levels. Finally, to boost the chances of ending the trade in profit, a date around April 4th should be selected as the contract expiry date.

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