Currency Pair of the Week: USD/ZAR

If Omicron news continues to be negative, the pair could be at the Inverted H&S target very quickly!

FOREX 8

The US Dollar Index (DXY)has been on a tear since November 10th, when the US released CPI at a rate 6.2% YoY.  With that, expectations of an increase in the pace of tapering of bond purchases began to increase, along with questions about the timing of interest rate hikes.  In addition, with the passing of the stimulus package last week, more funds will be unleashed into the system, theoretically creating higher inflation!  Over the last 2 weeks, no fewer than 5 Fed officials spoke about the possibility of an increase in tapering.  Powell is testifying in front of the Senate and Banking Committee on Tuesday, so markets are hoping to get an update as to the though process from the Fed Chairman. However, on the US Thanksgiving holiday last Thursday, everything changed as news of the Omicron variant of the coronavirus began making its way around the world.  In the half day session on Friday, the Dow Jones Industrial Average closed down over 900 points.  Fear gripped the markets.  Although risk-on has returned a bit on Monday, there are still many uncertainties surrounding the virus and its implications on the markets.

 

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Omicron was first diagnosed in Botswana and soon afterwards in South Africa, just a week after the South African Reserve Bank (SARB) raised interest rates by 25 bps to 3.75%.  This was the first rate hike in 3 years as concerns rose over increases of inflation in emerging markets.   The question for South Africa now (and possibly many other countries) is:  How will the Omicron variant of the coronavirus affect growth?  If the virus becomes more of a concern, SARB may be forced to cut rates at some point in the near future.  In addition, Gold mining companies have been pulled lower on the back of Sibanye Sillwater (SBSW) , which has failed to reach an agreement with labor unions.   Gold mining is a large part of the South African economy. What happens if there continues to be problems with labor negotiations and mines are forced to shut down due to the virus?  Watch for headlines regarding the SARB, Omicron, and gold mines!

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USD/ZAR had been moving lower since making pandemic highs in April 2020.  The pair finally made a near-term low on June 2021, moving from 19.339 down to 13.3713.  Upon moving higher, the USD/ZAR formed an Inverse Head and Shoulders pattern, breaking through the neckline and November 2020 highs at 15.5118.  The target for the Inverse H&S pattern is 17.7844, which is also horizontal resistance.  Note that the RSI is in overbought territory, indicating the pair may be ready for a pullback before resuming trend to target.

usdza rdaily ci

Source: Tradingview. Stone X

Where can it pull back to?  On a 240-minute timeframe, the USD/ZAR paused at the 161.8% Fibonacci extension of the August 20th highs to the September 10th lows, near 16.2048.  Horizontal support is at 15.9705 and 15.4912.  Resistance (see daily) is near Monday’s highs at 16.3608 and then 17.2643.

usdzar 240 ci

Source: Tradingview. Stone X

In the short-term, Omicron headlines are going to guide the direction of USD/ZAR. However, in the longer-term, it will continue to be about growth the inflation.  If Omicron news continues to be negative, the pair could be at the Inverted H&S target very quickly!

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