South African Rand Slips on Nu Variant Fears and Dollar Strength

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The South African Rand was on course for a third consecutive week of declines on Friday after being thrown off balance by a noxious cocktail of U.S. Dollar strength and a resurgent coronavirus threat, both of which risk lifting USD/ZAR to 16.50 while buoying GBP/ZAR into month-end.

The Rand fell amidst a broad sell-off on global markets that analysts attribute to a new Covid variant identified in South Africa.

"The negative sentiment is likely caused by the spike in mutated Coronavirus variant in South Africa. FX and fixed income markets are also reflecting a more cautious mood," says analyst Kjersti Haugland at DNB Markets.

The variant identified as "Nu" by the WHO has lead to a sharp spike in cases in South Africa, which scientists say makes it more transmissible than the previously dominant Delta variant.

The sheer number of modifications on its spike protein has also raised fears the virus will escape antibodies created by previous infections and evade vaccines.

The UK - the leading source of international tourists to South Africa - on Thursday night instituted a travel ban on the country and five other African states.

"Our immediate concern is the damage that this decision will cause to both the tourism industries and businesses of both countries," Foreign Minister Naledi Pandor said in a statemen in the wake of the UK decision.

GBP to ZAR weekly

  • GBP/ZAR reference rates at publication:
    Spot: 21.56
  • High street bank rates (indicative band): 20.80-20.96
  • Payment specialist rates (indicative band): 21.37-21.45
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"No doubt if we spoke to business executives today, they would also be citing concerns over SA’s burgeoning fourth wave of covid and worries over what that means in terms of lockdown restrictions, just as we eye the start of the so-called silly season," says Siobhan Redford, a macro strategist at Rand Merchant Bank.

Little is known about the new edition of the coronavirus and South Africa could yet be spared from an infection wave large enough to prompt a reintroduction of economically stifling curbs on business activity and social contact.

However the risk of such an outcome already appeared to have impacted USD/ZAR and GBP/ZAR by Friday while uncertainty about the implications of the variant could still act as at least a short-term headwind.

South Africa’s Rand was no exception to a broader market trend that saw the U.S. Dollar advance against all comers in the week to Friday after sustaining losses that pushed it to new 2021 lows while lifting USD/ZAR and GBP/ZAR to a hat-trick of weekly gains.

“The US yield curve has flattened as the front end has risen (in response to expectations that the Fed will raise rates next year) and the back end has fallen,” says Redford.

In a quiet week for the South African economic calendar Dollar strength has been the dominant influence on Rand exchange rates after the renomination of incumbent Federal Reserve Chairman Jerome Powell was followed by suggestions in minutes of November’s policy meeting that the bank could quickly become willing to speed up the pace at which its quantitative easing programme is wound down.

Each of these developments was perceived by the market as supporting a faster pace of tapering and an earlier lift-off for U.S. interest rates, which supported the Dollar.

Meanwhile the November meeting record revealed that U.S. rate setters were already entertaining a faster pace of policy normalisation even before official data revealed earlier this month that inflation rose to its highest level since 1990 in October.

USD/ZAR exchange rate shown at weekly intervals alongside U.S. Dollar Index and with Fibonacci retracements of 2020 downtrend indicating likely areas of technical resistance to the Dollar recovery

“We raise our USDZAR target to 16.50 (from a target range of 14.70-15.30). Our short term constructive views on the USD and lack of obvious rand-positive domestic catalysts suggest that the risk to USDZAR remains skewed on the upside,” says Nimrod Mevorach, a strategist at Credit Suisse (SIX: CSGN ).

“Last week’s break in USDZAR to levels above the previous year-to-date high (from January) leaves markets with no obvious resistance level (on the upside) other than the high in late October 2020 of close to 16.50. Meanwhile USDZAR currently sits well-above important technical levels such as its 200-day moving average,” Mevorach and colleagues wrote in a Tuesday research piece.

The Dollar rally has shown few if any signs of abating and could remain an uplifting influence on USD/ZAR and the closely connected Pound to Rand exchange rate (GBP/ZAR) over the coming days although now the Rand could also have to contend with adverse coronavirus developments in South Africa.

"Further up lies the September 2020 low at 16.0838 as well as the June and July 2020 lows at 16.3434/3613. Support can now be seen at the 15.4929/3950 August and early November highs. Upside pressure should be maintained while the cross stays above the current November low at 14.8637," says Axel Rudolph, a senior technical analyst at Commerzbank (DE: CBKG ), referring to USD/ZAR in a Monday review of the Rand’s charts.

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