South African Rand Approaches Pivotal Level for Recovery

The South African rand is currently trading at a level of importance to traders and analysts alike. Given the rand’s up and down journey, this level of importance has significant implications on the next phase of recovery for the rand as well as for millions of South Africans who depend on the global market to define their daily economic lives.

A currency's pivotal level is not a random identification. In essence, it is where technical, psychological and fundamental factors can be aligned in a way that will either allow for the continuation or reversal of a trend. For the rand, after enduring numerous pressures from both the inside of South Africa and the outside of South Africa, it is now at a critical point.

Structural problems that have historically plagued the economy and over time have diminished investor confidence are impacting South Africa and its economy today. Issues such as energy supply shortages, exceptionally high levels of unemployment, infrastructure impediments, and uncertainty over continued economic reforms are ongoing challenges that the rand faces on a day-to-day basis. Problems faced by South Africa today have existed for many years; however, unresolved issues continue to create hurdles for the currency whilst on a relatively positive backdrop from a global perspective.

In addition to the structural issues affecting the rand's performance domestically, South Africa's economy and the rand's performance will be impacted by many global factors. Emerging market currencies (such as the rand), tend to be very sensitive to changes in US dollar strength, appetite for global risk, commodity prices, and the interest rate policies of large central banks. The rand generally reacts fairly quickly to any negative changes in these variables.

There are also some valid reasons to feel cautiously optimistic. The South African rand has a strong foundation in commodities, particularly precious metals and minerals, and as long as global demand remains strong, these will continue to support the currency. In addition, there are early indications that there is beginning to be more successful implementation of structural reform, which will improve sentiment for some investors.

Whether the rand will use this important level as a launching point to position itself for a real recovery, or if it will fall back under renewed pressure and struggle to regain that level, will depend on domestic policy changes and global market conditions in the coming weeks.