Quick overview
- The rand strengthened against the dollar as USD/ZAR reversed below R16.50, influenced by falling U.S. Treasury yields and a weaker dollar.
- U.S. producer inflation surged in September, but the dollar weakened due to declining Treasury yields and mixed labor market data.
- Investors are focused on South Africa’s upcoming medium-term budget statement, which could impact public finances and credit ratings.
- The outlook for the rand remains fragile, with potential risks from oil prices, manufacturing activity, and U.S. monetary policy.
The rand strengthened against the dollar after USD/ZAR reversed below R16.50, as falling U.S. Treasury yields and a weaker dollar outweighed rising producer inflation, while investors turned their attention to South Africa’s medium-term budget statement.
USD/ZAR Reverses Below R16.50
USD/ZAR lost momentum last week after climbing above R16.75, with buyers failing to overcome resistance as the U.S. dollar weakened and Treasury yields declined. The pair subsequently reversed toward R16.50, suggesting that sellers remain active despite persistent inflation concerns in the United States.
The rejection leaves R17 as a major hurdle for dollar bulls. Unless the pair establishes a sustained break above this psychological level, the broader bearish trend could remain in focus, particularly if precious metals strengthen and oil prices retreat.
For the rand, the immediate outlook will depend on international market conditions and domestic economic developments, with South Africa’s medium-term budget policy statement emerging as a key event for investors.
U.S. Inflation Complicates the Dollar Outlook
U.S. producer inflation accelerated sharply in September, with the Producer Price Index (PPI) rising 1.3% month-over-month, its largest increase since March 2022. Annual producer inflation reached 6.3%, the highest level since December 2022.
Energy prices were the main driver, with final-demand energy prices increasing 10.8% and gasoline prices surging 20.3%. Producer prices excluding food, energy and trade services also rose 0.5%, indicating that inflationary pressure extended beyond energy.
Despite these figures and stronger-than-expected retail sales, the dollar weakened as Treasury yields retreated. The 10-year U.S. Treasury yield fell below 5.1%, while Federal Reserve Chair Kevin Warsh’s latest remarks provided no clear signal of an imminent October rate increase. Market pricing for an October hike subsequently declined to around 15%.
The September employment report also showed just 29,000 jobs added, while annual wage growth slowed to 3.0%. Although weaker labour-market data could support expectations of less restrictive monetary policy, persistent inflation remains a risk to that outlook.
South African Budget Takes Centre Stage
Investors are turning their attention to Finance Minister Enoch Godongwana’s medium-term budget policy statement, looking for evidence of improving public finances and a potentially more favourable sovereign credit-rating outlook.
South Africa recorded a trade surplus of R20.5 billion in August as imports declined 7.8% month-over-month to R161.3 billion, exceeding the 5.8% fall in exports to R181.8 billion. The government also recorded a monthly budget surplus of approximately R19.95 billion.
However, manufacturing output fell 4.3% year-over-year in August, reversing July’s 1.1% increase and missing expectations for 0.6% growth. High input costs, electricity constraints, fuel prices, U.S. tariffs and supply shortages continue to weigh on industrial activity.
The South African Reserve Bank’s recent 25-basis-point rate increase to 7.25% also reflects concerns about inflation risks linked to the Iran conflict and higher energy costs. Although elevated domestic interest rates can support the rand, they also increase borrowing costs for households and businesses.
USD/ZAR Returns Above R16
From a technical perspective, the failure to break above R17 represents an important setback for dollar bulls.
The pair’s move toward R16 suggests that sellers have regained control after the previous recovery attempt. A sustained break below key support could accelerate the decline and strengthen the case for a broader rand recovery.
However, the outlook remains fragile. A hotter U.S. CPI reading, renewed geopolitical escalation or a more dovish SARB could quickly undermine the rand.
For now, the combination of dollar weakness, stronger gold prices and softer U.S. labor data is giving the South African currency some much-needed relief, but the next major test will be whether USD/ZAR can sustain its move lower rather than simply correcting from the failed R17 breakout.
USD/ZAR Chart Weekly – Reversing at the 50 SMA Again
On the daily chart above, the trend has been bearish for more than a year, with moving averages acting as resistance during upside rice action. But the pair has now pushed above the 200 daily SMA in purple, opening the door for R17. However the price formed a doji candlestick up there after finding resistance at the 50 SMA in yellow and it has started to reverse lower.
On the monthly chart below, USD/ZAR seems to have bottomed at the 100 SMA (green) where it found support in the last two months. Last month we saw a rebound as the Rand weakened while the Dollar gained, but buyers are facing the 50 SMA (yellow) and in April the forex pair has reversed lower again. For the larger uptrend to resume, USD/ZAR would need to push above this moving average but sellers remain in control for 2 years and the downside is also at risk.
USD/ZAR Chart Monthly – Returning Finding Support at the 100 SMA
Oil Prices Remain a Major Risk
South Africa’s dependence on imported fuel leaves the rand vulnerable to renewed increases in global oil prices. Escalating Middle East tensions could raise transport and production costs, adding to inflation and potentially forcing the SARB to maintain restrictive monetary policy for longer.
Conversely, falling oil prices could ease inflationary pressure and improve the rand’s outlook, particularly if precious metals also attract stronger demand.
USD/ZAR Technical Outlook
USD/ZAR’s rejection above R16.75 and retreat toward R16.50 suggest that selling pressure remains significant. Continued weakness could open the way toward lower support levels, although a sustained move above R17 would weaken the bearish setup.
For now, the rand has gained ground, but the recovery remains exposed to oil-price volatility, weak manufacturing activity and uncertainty over U.S. monetary policy. Godongwana’s budget statement could provide another catalyst as investors assess whether improving fiscal conditions can reinforce the currency’s recent gains.
Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst.
Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank’s local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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