USD/ZAR: Is the Recent Bounce Just Another "False Dawn" for Bulls?

Two weeks ago, we highlighted the potential for a bottom to form near 10.35 on USD/ZAR (see “USD/ZAR: Could This Be a Near-Term Bottom?” for more). As it turned out, the pair did find floor near the highlighted level, and rates have since rallied back up to test the 10.60 level. That said, a much more important technical test looms before traders can shift back to an outright bullish bias.

Yesterday, investors got their first glance at March inflation data in the Rainbow Nation. The headline CPI figure came in at 1.3% m/m, higher than the 1.1% that traders and economists were expecting. The unexpected rise in prices was driven primarily by increases in the cost of food and fuel, which are typically seen as temporary fluctuations, so the SARB may decide to hold off from raising interest rates at its meeting next month, though most analysts expect a hike at some point this year.

Looking to the daily chart, the USD/ZAR has bounced, but rates are now approaching a critical test of resistance near the convergence of the bearish channel off the late January high and previous-support-turned-resistance at 10.65. Given the repeated false dawns that USD/ZAR bulls have seen over the past few months, bulls are treating the recent bounce with skepticism.

That said, the secondary indicators suggest that the character of this bounce may be different than previous rallies. For one, the RSI indicator has broken above its corresponding bearish trend line, potentially leading a breakout in the price of the USD/ZAR itself. In addition, the MACD has turned higher and crossed above its signal line, showing declining selling momentum, if not an outright shift to new buying momentum in the market.

Despite these signs, conservative traders may still want to wait for a conclusive break above the bearish channel and 10.65 before taking new buy trades. If we do see a breakout, bulls may look to target previous resistance at 10.95 next. Meanwhile, if the recent rally turns out to be yet another false dawn for USD/ZAR bulls, a reversal back to key support at the 61.8% Fibonacci retracement and 200-day MA near 10.35 could come into play.