WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 7 May 2007
I always suspected that a break below USDZAR 7.00 was going to hurt but it took two attempts to finally get the USDZAR longs running for cover. We’ve moved pretty swiftly this past week down to 6.90 which has dragged GBPZAR down whopping 40 or so cents to 13.75.
There are traditionally two areas of analysis used in the financial markets. The first is fundamental analysis which basically uses economic principles to value a security and the second is technical analysis which analyzes price action only through the use of charts to determine the future direction of a security.
Fundamental analysis monitors things like GDP, inflationary measures .etc. to value an economy and its effect on a particular security. It takes into account all the relevant economic measures that directly and indirectly affect the price of a security and uses these expectations to determine both a current and future value of a security. Blah blah blah.
This isn’t a lesson in analysis as I’m certainly no expert but the point that I am leading to is that fundamentally I believe the SA economy is in trouble. We have a massive trade deficit, soaring inflation, fairly stagnant GDP, huge disinvestment out of SA, political infighting, high crime levels, unemployment, skills shortages……….you name it – SA has it.
So here’s the thing – why is the ZAR strengthening?
It’s strengthening for the simple reason that real money players (most of who are foreign traders based overseas who know almost nothing about SA and care even less) have seen the market pushing the USDZAR 7.00 level and knowing this have decided to take it on and trigger stops below.
This is where technical analysis comes into play. Price action is the one and only truth in the market. It ignores biases, opinions, analytical miscalculations .etc. Put it this way – there’s no point watching a market drop 50 cents and saying ‘well the ZAR shouldn’t be trading at 6.90 but its fair value would be somewhere near 8.00’.
I’ve been guilty of wearing my personal opinion on my heart and it seems that Mr. Mboweni is suffering from a similar bout of ‘my opinion is more important than what the market is actually doing’. Opinions mean absolutely nothing when it comes to the financial markets. The only thing that counts is what the market is actually doing. This is where technical analysis comes into play.
It ignores my opinion, your opinion, and your auntie’s opinion, what her neighbour said………and focuses solely on what the market is actually doing.
As mentioned in previous commentaries, for all the big talk around the ZAR the fact of the matter is that up until last week it was trading a fairly tight 7.03-7.54 range so was effectively flat lining for the year. Truth be told, I was expecting a break through the topside of this range at 7.54 which would be more in line with the fundamental picture in SA but at the end of the day we’ve broken through the bottom taking USDZAR down 10c and GBPZAR off about 30 cents. That’s what happens when u break out of the bottom of a large trading range.
The problem here for ZAR bears is that this doesn’t look particularly good for the USDZAR for the rest of the year. It seems to me that the ZAR has made a decision and committed to a move stronger.
I would expect to see very strong sellers around the USDZAR 7.00 level who should be real money strong hands looking to sell for a move below 6.87. This is your current risk and trust me – it’s a big one!
Don’t get caught on the wrong side of this move as a break below 6.87 is going to be good night nurse in a big way. It is looking to me at this stage that a break of this level is looking inevitable.
Whenever I do think that the USDZAR may move lower I always like to clarify it by saying something like ‘unless our china beans at the Reserve Bank or someone in government says or does something really stupid this week’. I sometimes think that we don’t give these okes enough credit as maybe they’re far smarter than we think they are. It’s well known that the Reserve Bank are buying foreign currency like there’s no tomorrow and they’re leaning strongly towards a weaker ZAR (for fairly obvious reasons). It’s truly unbelievable how well timed these silly comments sometimes are – just when the ZAR is priming itself for a major move stronger – the guys come out with some crazy comments sending the ZAR significantly weaker.
Either just plain stupidity or very, very clever. I’ll let you decide but don’t be surprised.
Mboweni is obviously getting worried as he’s been in the media over the last week calling for a weaker ZAR. I can only assume that he knows that a break below 7.00 and 6.87 will be a massive, massive hit for USDZAR and probably rule out a weaker ZAR for the rest of the year – which puts a bit of a dent on the intentions of the Reserve Bank and Finance Ministry.
Anyway good luck and keep an eye on the below.
Important levels to watch for the week are as follows:
Resistance 3 – 7.40
Resistance 2 – 7.03 (bottom of former 2007 range)
Resistance 1 – 7.00 (big figure)
Current Price – 6.87
Support 1 – 6.87 (major low)
