- You might be wondering why I'm bringing this pair to your attention, but it's a great technical setup, and a few years back, this used to be one of the go-to carry trades.
- The South African Rand typically has a much higher interest rate than the Japanese Yen, so there was a phenomenon where Japanese investors were buying South African Rand and shorting their currency.
- That being said, the South African interest rate has been cut recently, but it is still a significant interest rate differential that you are looking at. In fact, it's basically wide enough to drive a truck through. In South Africa, it's 7.5% and in Japan, it's between 0.25% and 0.5%.
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So, you get paid quite a bit to hang on to this pair. So, assuming that everything is good, and risk appetite is still strong, traders will jump into this pair. You can see clearly during the trading session on Wednesday, there has been a definitive upward bias as we find ourselves at the 8.35 level. The 200-day EMA as well as the 50-day EMA indicators have both been broken to the upside, and now it looks like we might go looking to the 8.50 level above. Short-term pullbacks should continue to be supported, especially near the 8.15 level. Even if the Bank of Japan does continue to raise interest rates, and it will do so very slowly, the differential is just too wide to make it something that you would ignore.
The only way that I see this pair truly falling apart is if in fact, South Africa does end up facing a lot of tariffs coming out of the United States. And of course, there's some type of major risk off event. If that's the case, then all bets are off. But I do like buying this pair on dips. This was something about 10, 12 years ago that traders in Japan just loved.
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