Dominating news is US FEDs unexpected dovish stance. At the backdrop of Trump’s call for loose interests and protection of investors, it appears as if Jerome Powell heeded to his call stating that the Fed fund rates will remain steady between the 2.25 percent and the 2.5 percent in the “longer run”. Back in August 2018, Trump slammed the Feds saying they were the only problem ailing their economy since they “they don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders” urging them to press the brakes on interest rate hiking because “they think the economy is so good.”
Improving US—China Trade Relations and Current Account Deficit
If anything, this was against everything the investor and
trader community was expecting now that two more plans were scheduled for 2019
and one more in 2020 as the US economy expands. However, with tension
dissipating and the US-China trade deal finding fitting and beneficial trajectory,
it is likely that the USD will weaken in days ahead thanks to the economy’s
current account deficit expected to prop the economy.
But we note that while the US stands to outperform other economies,
there needs to be a steady flow of capital to the economy if the USD is to be
propped. If not, it is likely that recent USD gains will be gradually eroded and
further accelerated by thawing relations between the US and China on trade
matters which will no doubt prevent upside potentials for the USD.
Here’s what Avery Shenfeld and Taylor Rochwerg of CIBC had
“The US current account gap hasn’t improved at current exchange rates, despite America getting closer to being a net exporter of oil. The wind down from earlier fiscal stimulus will actually help that balance, by reducing the growth in US import demand. But at the same time, the reduced fiscal stimulus, and a marginal tightening in fiscal policy in 2020, is key to soft track for the Fed on monetary policy, and it’s that development that should promote a weakening DXY in the medium term.”
USD/ZAR Price Analysis
From the chart, it is clear that prices are literally all
over the place. At the back of a dovish FED, USD should weaken in the short to
medium term but that has not been the case. Instead, Mar 22 sharp gains did
reverse ZAR gains by week ending Mar 22.
Regardless of these developments, we are still bullish on
ZAR and even with a bullish USD breakout pattern of Mar 6, it is likely that
prices will drop below the 20-day MA and our minor support at $14.15 as ZAR strengthen.
Any sharp drop below 14.10 at the back of high trade volumes exceeding 145k averages registered by Mar 25 close and more importantly 305k of Mar 21 will valid our previous USD/ZAR trade plan setting in motion the next wave of sell pressure that could see ZAR retest 13.80, 13.20 and 13 by June 2019.
Otherwise, if USD build momentum and the bullish breakout of
Mar 5 is confirmed by equally high trade volumes driving prices above 14.70,
then traders should activate their longs on dips with first target at Q3 2018
highs at 15.75.
All charts courtesy of Trading View.
This is not Investment Advice. Do your Research.
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