ZAR Commentary – 21 May 2007
The market has changed its tune over the past week or so and are once again anticipating interest rates hikes in South Africa on the back of strong inflationary pressures once again rearing their ugly heads. I’ve always felt that the SA Reserve Bank have been a tad behind the curve and once again this seems to be the case as they always seem to be playing catch up with the interest rate cycle. The thing here is that our good friends at the Reserve Bank don’t seem to have the foresight to look much beyond 3 or so months into the future and act in a proactive way to stem the inflationary tide. It’s seems that they’re playing it on a month by month basis without being predictive and proactive in their monetary policy. So it seems we’re gonna be back on the interest rate bandwagon again and more increases are on the cards.
So how does this affect the ZAR you ask?
Well there are two schools of thought here. As I read page 27 of my Economics 1 textbook it tells me that increases in interest rates have a strengthening effect on a particular currency as investors seek to pile into higher yielding currencies. This could certainly play out in the current market environment as the theme in the FX markets for 2007 so far has been the ‘carry trade’. What basically happens here is that investors borrow money in low yielding currencies such as JPY and CHF, and invest in relatively high yielding currencies such as GBP, EUR, USD, AUD and of course the ZAR also gets a bit of this action. Add to this the fact that commodities such as gold are performing like champions of the universe and you get an environment within which the ZAR is bound to strengthen.
So that’s the one theory.
The other theory goes a little something like this. If there is one thing the market doesn’t like it’s unpredictability. Is it surprising then that the ZAR is one of the most volatile currencies in the world? It’s volatile for a reason and that reason is that the SA Reserve Bank are more unpredictable than a season of Lost. Jokes aside, traders are simply not comfortable being invested in a market, currency or economy that may be (perceived or otherwise) slightly unpredictable. And this is where volatility and the catchphrase ‘emerging market jitters’ comes from. There is an associated higher risk being invested in emerging markets such as the ZAR and I don’t think that the fact that the SARB don’t seem to have inflation under control is helping.
Ignore my personal opinion that the ‘actual cost of living’ in SA is increasing at an annual rate closer to 20% than 10% pa with soaring credit levels – you potentially have a nice little storm brewing.
So those seem to be the two schools of thought in a nutshell and at this point in time the ZAR could go either way. Once again we seem to be stuck in a tight trading range and we don’t seem to be going anywhere.
I wouldn’t expect any miracles from the ZAR at this point in time. The pressure at this point in time is skewed to a downside move in USDZAR (stronger ZAR) from a technical point of view but there seem to be some pretty strong buyers around these levels who are supporting price quite nicely at the moment.
I always like to say to people to watch the big support and resistance levels which usually give us a clear indication of what the market wants to do. Simply put, real money buyers are found at support points when the market is moving downwards, and real money sellers at resistance points when the market wants to go up. By real money players I mean big traders with massive amounts of money behind them. So when these big hitters are overcome on the downside (break of support) or the upside (break of resistance) it becomes pretty clear that if these big players are unable to hold the market up/down then there’s a good chance the market is going to fly in the direction of the breakout above resistance or below support.
So here are these levels as the market currently sees them and for this week these are the levels we need to watch when making your currency decisions:
Resistance: 7.16 (April 19th and April 30th highs)
7.07** (This level is key and looking for a break above here to signal new move higher – May 11th and 18th highs)
Current Price: 7.00
Support: 6.96 (10 Day Moving Average – look for price to stay above here for this week or key 6.87 may come under pressure)
6.90 ( May 17th low)
6.87** (This is the key level as 2007 lows – if you see this level break then the ZAR will go significantly stronger – keep an eye on this)
Please note that all other ZAR crosses (GBPZAR, EURZAR…..) will follow USDZAR as above so keep an eye on these levels and good luck for the rest of the week ahead.
