WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 29 April 2007
Let’s put the latest moves in USDZAR into perspective.
So here are the facts – USDZAR has broken to the downside of it’s yearly 7.03 – 7.54 range which normally would be considered to be strongly indicative of the potential direction over the next 3-6 months. We’ve even managed to dip slightly below the 7.00 level which is without question a big sell signal .ie. sell USD and buy ZAR.
Truth be told I bought USDZAR in the low 7’s for a little punt but then got stopped and flipped my position when we broke under the key 7.00 figure. The problem here is that I’m getting whipped even worse than our fellow countrymen in the Caribbean.
There’s no question that a dip below 7.00 and a downside breakout below the bottom of the yearly range points towards a stronger ZAR over the next few months.
The problem here though is that price was rejected fairly quickly from these lower levels and recovered very aggressively to trade back up to 7.08.
Psychology is all important in the financial markets and those who sold the downside break below 7.00 and subsequently found price trading at 7.08 are going to be a little tentative to do the same thing again and sell another downside break.
It’s sometimes said in the markets that price needs to test the lows to see what’s there before moving upwards again. It’s a little tester to just see how committed the USDZAR sellers really are.
In this particular case, the answer seems to be a resounding ‘Not that committed!’.
GBPZAR and the other ZAR crosses seem to be holding their ground quite nicely indicating that it’s not necessarily ZAR strength that’s moving USDZAR lower.
The fact is that the USD has this week traded to all time lows against the EUR, and multiyear lows against pretty much everything. I suppose it’s not surprising then that USD sellers decided to give the USDZAR 7.00 level a bit of a go.
If USDZAR can’t break below 7.00 and maintain these levels in this current environment of the USD going to all time and 15 odd year lows across the board – then will it ever?
Maybe the market is telling us something?
Gold was pushing $700 (which is very ZAR positive) and the USD is trading at all time lows versus the EUR (who happens to by SA’s largest trading partner and supposedly there’s some sort of correlation between the ZAR and EUR – so the analysts say!) but at the same time USDZAR is struggling to dip below 7.00
Add to this that USDZAR dipped below 7.00 on back of the big of massive double digit PPI data and renewed expectations of further interest rate increases in SA. The initial reaction is always to buy a higher yielding currency which is exactly what happened and ZAR went below 7.00 but my feeling is that maybe when the guys thought about it – higher interest rates and the resultant increased yield associated with holding ZAR are probably offset by the fact that an increase in interest rates is not the best medicine for SA.
Not only that but it doesn’t look as if the Reserve Bank are in control of this economy. Looks like inflation has the MPC toyi-toying to it’s own tune. A little behind the curve I always say.
So anyway, I still think we’re stuck in a market that isn’t sure where to go and we’re a little in limbo at the moment.
My personal opinion is that the fundamentals don’t support a stronger ZAR and the rejected downside break may swing the technical bias to the upside over the coming week if price is able to hold above 7.00. Look for a break above 7.09 this week which is roughly the downtrend line of the 7.54 – 6.93 fall.
The USD is massively oversold at the moment so I expect some profit taking to support any further weakening in the USD over the next week. This should support USDZAR and a slightly weaker ZAR over the next few days.
Beware of another downside break below 7.00 which should now be good support once again. The risk at the moment is that 7.00 breaks again and we have a sharp fall down to 6.87 or so which will bring the GBPZAR and EURZAR crosses off 20-30 cents.
Important levels to watch for the week are as follows:
Resistance 3 – 7.40
Resistance 2 – 7.24
Resistance 1 – 7.09 (downtrend line)
Current Price – 7.22
Support 1 – 7.00 (key big figure)
Support 2 – 6.93 (short-term low)
Support 3 – 6.87 (major low)
