Dol­lar for dol­lar

Track­ing the value of the green­back — and its ef­fect on the rand

Financial Mail - Investors Monthly - - Analysis: Technical -

The last time the US dol­lar in­dex was cov­ered in this col­umn was in March 2018. In that col­umn, an im­por­tant long-term sup­port zone on the in­dex was shown at 88 and it was sug­gested that the dol­lar weak­ness that had been ev­i­dent over the 15 pre­ced­ing months was likely to give way to a pe­riod of dol­lar strength. That anal­y­sis worked well, and the green­back has since strength­ened.

From March to July, the in­dex moved from 88 to 95, for an 8% gain. The 95 level rep­re­sents an im­por­tant area of re­sis­tance, and has proven sticky over the past few weeks.

It’s a sig­nif­i­cant re­sis­tance level, as it was the swing high in Oc­to­ber 2017. The fact that the in­dex has strug­gled at that level sug­gests the dol­lar is run­ning into re­sis­tance against the bas­ket of cur­ren­cies that make up the in­dex.

The big­gest con­trib­u­tor to the in­dex is the dol­lar-euro pair. The other cur­ren­cies that make up the in­dex — al­beit with smaller weight­ings — are the Cana­dian dol­lar, pound ster­ling, yen, Swedish krona and Swiss franc.

From a tech­ni­cal per­spec­tive the 95 level on the in­dex would need to be over­come to open fur­ther strength for the dol­lar. If the cur­rent pe­riod of con­sol­i­da­tion con­tin­ues for the next few months but the in­dex makes a higher low, then it’s pos­si­ble that an in­verted head and shoul­ders pat­tern will form, with the neck­line at 95.

Given the in­ter­est rate dif­fer­en­tial be­tween the US and the coun­tries whose cur­ren­cies con­trib­ute to the in­dex, one would think the ris­ing in­ter­est rate trend in the US will keep the dol­lar on the front foot. A break above 95 would be bullish for the green­back and point to fur­ther medium-term gains for the cur­rency.

The rand has traded in a strength­en­ing chan­nel since the end of 2015. The chan­nel bound­aries can be seen on the chart and have con­tained the rand’s trad­ing ac­tiv­ity against the dol­lar over the past 2½ years.

The cur­rency has re­cently tested the up­per bound­ary of the chan­nel at R13.80. A few over­shoots to R14 have been short-lived and mostly show up on the chart as noise.

The rand be­gan to weaken in March and has lost about 20% from its strong­est lev­els ear­lier in the year. Some of that weak­ness can be at­trib­uted to the strength of the US dol­lar (this ac­counts for about 8% of the loss). The re­main­ing weak­ness has come about due to gen­eral emerg­ing-mar­ket risk aver­sion, as well as do­mes­tic is­sues such as the dis­cus­sions around land ex­pro­pri­a­tion with­out com­pen­sa­tion.

The key lev­els to mon­i­tor in the near term are R13.10 at the lower end and R13.80 to R14 at the up­per end. A res­o­lu­tion through ei­ther of th­ese lev­els is likely in the weeks or months

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