- The USD/ZAR pair has dropped sharply in 2020 because of the risk-on sentiment in the market.
- The performance has been because of the actions by the Federal Reserve.
- The pair will possibly continue falling in 2021 before an eventual rebound.
The USD/ZAR pair dropped by more than 5% in 2020 amid a global coronavirus pandemic. The pair dropped by more than 24% from its peak in March, making the South African rand one of the best-performing currencies in the world.
Risk-on sentiment wins
The South African rand gained for the most part of 2020 because of the overall risk-on sentiment in the market. This refers to traders’ willingness to take on more risks in the financial market.
Are you looking for fast-news, hot-tips and market analysis?
Sign-up for the Invezz newsletter, today.
As a result, the demand for US dollars waned as they moved to other currencies like the euro, pound, and Mexican peso. Also, investors moved to other assets like cryptocurrencies, pushing their total market cap to more than $560 billion.
The USD/ZAR price also declined because of the actions by the Federal Reserve. The bank slashed interest rates and flooded the market with liquidity, through its quantitative easing policies.
Similarly, the US congress also pushed new stimulus worth trillions of dollars. This trend will continue in 2021, especially if Democrats take back the senate.
South Africa coronavirus debt load
The USD/ZAR price fell in a year when South Africa suffered its worst recession in modern times. The country recorded more than 1.1 million coronavirus cases and more than 27,000 deaths.
As a result, the government boosted its borrowing. In fact, it received funds from the International Monetary Fund (IMF) for the first time ever. Subsequently, all major credit rating agencies like S&P Global, Fitch Ratings, and Moody’s downgraded the country to junk status.
In its report, Fitch said South Africa’s debt-to-GDP ratio would rise to 94% by 2023, the highest level on record. The company also warned about the high debt levels of the country’s state-owned companies like Eskom and the South African Airlines (SAA). The report said:
“Liabilities of state-owned financial and non-financial enterprises and guarantees to independent power producers and for private-public partnerships amounted to 20.5% of GDP at end-March this year. The financial performance of many of the companies, including the largest, the electricity producer Eskom, is poor.”
Therefore, the USD/ZAR price could reverse in 2021 as investors start to think about the rising South African debt and lower recovery. This will further be exacerbated if the US economy recovers faster pushing the Federal Reserve to turn hawkish.
USD/ZAR technical outlook
On the weekly chart, we see that the South African rand has been on a sharp uptrend against the US dollar. The pair is slightly above the 61.8% Fibonacci retracement level and below the 25-day and 50-day exponential moving averages. Notably, the Relative Strength Index has moved to the oversold zone.
Therefore, the pair will possibly continue dropping to the 78.6% Fibonacci retracement level at 13.00 in the near term before rebounding later in 2021. You can take advantage of this volatility by opening an account with some of the leading CFD trading brokers.