EM Rundown: The biZARre collapse in South Africa's rand

With Tokyo markets offline for a bank holiday (happy Coming-of-Age Day to our Japanese readers!) following the late day collapse in US equities to close last week, traders had reason to expect that we could see some volatile price action to start this week’s trade. When Chinese authorities failed to cut the country’s Reserve Requirement Ratio (RRR), as some traders had been expecting, and actually set the value of the yuan slightly higher, it dropped a firecracker into the powder keg, leading to bizarre price action across all markets.

Chinese stocks finished the day down over 5%, but the fear did not carry over into European trade, where stocks are staging a much-needed oversold bounce. Meanwhile USD/JPY, the quintessential measure of risk appetite in today’s markets, dropped all the way down to 116.60 before reversing violently to trade back near 118.00 as of writing.

By far the biggest moves in today’s low liquidity Asian session trade were in emerging market (EM) currencies, specifically in Africa. While not too many traders are focused on the Angolan kwanza or Zambian kwacha, both of which saw big negative moves, the South African rand is one of the top 20 currencies by total volume and saw perhaps the most shocking move.

South Africa’s economy is heavily dependent on exporting minerals and metals to China, and rand traders reacted (some would say overreacted) to this fact by driving the rand down a staggering 10% against the US dollar, pushing USD/ZAR to a fresh record high at nearly 17.50. Since China first devalued the yuan back in August, South Africa’s currency has fallen by a jaw-dropping 25% against the US dollar.

Traders have since calmed down somewhat, and USD/ZAR has settled back toward 16.60, but trade is still extraordinarily volatile and risks in the pair remain elevated. The next big economic report for EM FX traders to watch will be Wednesday’s Chinese Trade Balance figures, which are expected to show declines in both exports and imports in the world’s second-largest economy.

On a technical basis, there is a chance USD/ZAR may have just seen its blowoff top. The pair is currently showing a large Bearish Pin Candle* in progress on the daily chart, showing a big intraday shift from buying to selling pressure. Meanwhile, the RSI indicator is extremely overbought and in a state of bearish divergence relative to the mid-December high.

As long as USD/ZAR holds below today’s panic high near 17.50, a dip back toward more sustainable trend line support in the mid-15.00s will be favored. That said, the economic data for both China and South Africa shows no signs of imminently turning positive, so longer-term traders may want to consider fading any near-term dips as the major trend in USD/ZAR remains to the topside for now.

*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.