Dollar for dollar

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

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