Political Uncertainty Plaguing South Africa – Is There A Profitable Trade In The Rand’s Freefall?
The South African Rand had a wonderful first seven months this year when the currency strengthened more than 10 percent against the U.S dollar thanks to a diversified economy with expanding manufacturing, growing retail sales and improving business confidence. However, everything has changed since a bomb named “political uncertainty” exploded last week. The developing country is on the verge of falling into a recession as its Finance Minister Pravin Gordhan may be arrested, which has caused the national currency to slump more than 5% versus the dollar over the last few trading sessions.
Rumors of an arrest first emerged in local South African media back in May but Gordhan said allegations against him related to his time as head of South Africa’s tax agency are wholly unfounded and refused to appear in front of the police. Last week, the case became boiling hot following news that the National Prosecuting Authority (NPA) had received a “docket” for charging Gordhan with crimes, although a decision to arrest him immediately has not been reached. According to the chief prosecutor, the evidence provided was only reviewed.
The problem for South Africa is that, if Gordhan is arrested, the country’s creditworthiness will be affected as he is seen as a minister with fiscal discipline, who has been fighting against the country being downgraded to junk status by credit rating agencies. According to market sources, political risks could see the country’s debt downgraded to junk this year, while the rand could slump as much as 30 percent against the dollar.
Coupled with the political turmoil caused by the Gordhan investigation, the U.S dollar, which is on the brink of a second interest rate increase after the December 2015 rate hike, is another factor heaping pressure onto the rand. Fed officials are considering tightening rates as soon as September and recent data is fueling this speculation further. Markets are paying attention to the monthly jobs data that is due on Friday, which is forecast to report that 180,000 more jobs were added in July.
Fig: USDZAR D1 technical chart
The greenback has been on a sharp up move from the 10-month low at around 13.19330. The rally is so powerful that it took the pair to move past the 23.6% retracement easily, the level at which USDZAR has traded sideways and made a short term bottom at, on many occasions through this year. The currency pair is facing solid resistance at the upper trend line connecting through previous highs. Compared to previous failed attempts, the bull this time is stronger as it has been able to sustain the market within the overbought territory for a long time and has not yet shown any sign of a retreat. Thus, a breakout is expected.
Buy Stop at 14.50000, Take profit at 14.65000, Stop loss at 14.15300