The USD/ZAR exchange rate will be in the spotlight this week as investors react to a recent court ruling that raised impeachment risks for President Cyril Ramaphosa. It was trading at 16.43, down from the April high of 16.91 and the year-to-date high of 17.2470.
Cyril Ramaphosa’s impeachment risks rise
The South African rand has been one of the top gainers in the forex market in the past few months. It has jumped by nearly 18% from its lowest level in April last year.
One reason for the surge is that the South African economy has stabilized after the last election. The African National Congress (ANC) and the Democratic Alliance (DA) decided to form a government of national unity, which is making substantial progress.
South Africa’s economy has improved, pushing S&P Global to boost South Africa’s credit rating. Analysts expect that Moody’s and Fitch will do the same this year.
The economy expanded by 1.1% last year, the best performance in three years, with finance, trade, and services driving this growth. Inflation dropped before the US-Iran war, pushing the central bank to deliver several interest rate cuts.
Now, however, there is a risk that this growth will be derailed as some politicians call for Cyril Ramaphosa’s impeachment. These calls rose after the Constitutional Court ruled that the parliament had violated the constitution by blocking moves to impeach him in 2022.
An impeachment, leading to his removal from office, would negatively affect the South African economy. For one, Ramaphosa is viewed positively by the business community. It would also leave the coalition government on edge and potentially capital flight. Still, most commentators believe that he will not be impeached.
South African rand’s carry trade opportunity
One reason why the South African rand may continue doing well in the near term is its role as a carry trade opportunity. The central bank left interest rates unchanged at 6.25% in the last meeting, higher than the Federal Reserve’s 3.75%.
Analysts believe that SARB will now hike interest rates later this year to curb the rising inflation. At the same time, Goldman Sachs analysts expect that the Federal Reserve will leave interest rates unchanged and cut in December.
If this happens, it means that the spread between South Africa’s and US interest rates will widen, creating a good carry trade opportunity. A carry trade is a situation where investors borrow a low-yielding currency and invest in a higher-yielding one.
The next key catalyst for the USD/ZAR pair will be the US inflation report, which comes out on Tuesday. Economists expect the report to show that the headline consumer inflation jumped to 3.6% in April as energy prices jumped.
USD/ZAR technical analysis
USD/ZAR chart | Source: TradingView
The daily chart reveals that the USD to ZAR exchange rate has pulled back in the past few weeks. It has dropped from the year-to-date high of 17.23 to the current 16.45.
The pair has dropped below all moving averages and the Supertrend indicator. It is also forming a small bearish pennant pattern, which is a common continuation sign in technical analysis.
Therefore, the most likely scenario is where the pair continues falling, potentially to the next key support level at 16.00. A drop below that level will point to more downside, potentially to 15.65, its lowest level on January 29.
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