The USD/ZAR price declined sharply as investors reacted to the sharp rise in South Africa’s consumer price index (CPI). The pair retreated to a low of 15.40, which is lower than Tuesday’s high of 15.60.
South Africa inflation
South Africans are paying more for basic products as the overall energy costs jump. According to the South African statistics bureau, the headline inflation rose from 0.5% in November to 0.6% in December. This increase was better than the median estimate of 0.4%.
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On a year-on-year basis, the country’s inflation rose from 5.5% to 5.9%. It was also the fastest rate that consumer prices have jumped since 2017. At the peak of the Covid-19 pandemic, the country’s inflation fell to about 2%.
This increase was mostly because of a sharp increase in food and energy prices. Excluding the two, the country’s inflation rose from 0.1% to 0.3% on an MoM basis. It then rose marginally from 3.3% to 3.4%.
The USD/ZAR pair retreated because these numbers point to a more hawkish South African Reserve Bank (SARB). The bank hiked interest rates three times in 2021 and analysts expect that it will deliver several more this year in a bid to tame inflation.
A major risk for the South African rand is the Federal Reserve. The bank is also expected to deliver at least thre rate hikes this year. As I wrote elsewhere, a hawkish Fed has a negative consequences for emerging market economies that will pay higher rates on their dollar debt.
Indeed, the USD/ZAR pair has risen slightly recently because of the ongoing rise in US bond yields. The 10-year rose to the highest level in two years.
The three-hour chart shows that the USD/ZAR pair rose on Tuesday as bond yields rose. The pair then retreated sharply after the latest South African inflation data. It has formed a bearish flag pattern and moved below the 25-day and 50-day moving averages. In technical analysis, a bearish flag pattern is usually a bearish signal.
Therefore, the pair will likely keep falling as bears target the next key support level at 15.00. This view will be invalidated if the pair rises above 16.00.
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