Key week ahead for the South African Rand
There is one week a month that I kind of put the technical analysis and opinions on the backburner and say to myself - ‘Hey, this thing could go anywhere!’
There’s good reason for this view, and these reasons are CPI, PPI and the Trade Balance which will all be released this week.
So my focus shifts to that of a fundamental one – or as some would say a complete thumb suck! Hah hah. Truth be told, I don’t think I’ve ever seen these economic figures come out in line with market expectations which makes it a bit of a dangerous week and backs up my theory that it’s better to play it safe over these economic numbers.
One sure thing during this week is that the ZAR will move. Which way is anyone’s guess? It’s not so much about the actual figures that get released but how the market is positioned prior to the release! By this I mean: if the whole market has bought ZAR in anticipation of higher than expected inflationary data (and therefore increasing interest rates which should benefit the ZAR) and the figures come out in line with expectations then the market will sell the ZAR that they bought in anticipation of hawkish data. If the data comes out below expectations then the market will sell their ZAR even more aggressively as they run for cover.
This indecision, false expectations, hope, pre-number gambles .etc. all result in a nice little volatile concoction for the week ahead.
Nobody is really sure what the numbers will be, particularly the trade balance, which can swing R10-20 Billion every month. One of the major duff ups in South Africa at the moment is this:
3rd Quarter 2006 Current Account Deficit – 5.7% of GDP
4th Quarter 2006 Current Account Deficit – 7.8% of GDP
1st Quarter 2007 Current Account Deficit – Expected at 7% of GDP
Anything over 4-5% of GDP is considered a serious, serious problem for any economy and I don’t believe SA (and the ZAR) has taken the brunt yet of this position. This is a major, major problem and it is going to be interesting to see what this number comes out as.
The bottom line then for this week is as follows: By Friday we will have a very clear picture of the fundamental position of the SA market and the ZAR for the next month or so.
Be careful though as the ZAR will move this week.
Technical Commentary
Rights guys, I’m going to start off with a warning first up. It’s not an opinion or where I think the market will or won’t go but it’s important to bring this possibility to the attention of any ZAR bears out there holding out for a move weaker over the rest of the year.
* Please bear in mind that my personal opinion is still for a weaker ZAR over time supported by weakening fundamentals, political instability .etc. blah blah blah
BUT
There is a potential Head and Shoulders top forming on the daily charts with the neckline at 7.06 (which is pretty close for comfort at the moment). Please note this is a ‘potential’ USDZAR bearish formation and will only be confirmed by a clear break below 7.06 but it is always important to plan for alternate scenarios in advance so that you are ready to act if they do happen and you aren’t left for dead if the market drops below this level.
This is one of many scenarios that could play out but it without question the most dangerous of all ‘potential’ scenarios that I presently have in mind and could see USDZAR pushing down towards 6.86 and below IF the market breaks below 7.06. So just be aware of it.
As mentioned, this week will be primarily determined by economic figures but every single movement in the ZAR paints a technical picture for us to indicate where and when it would like to go.
On a week such as this we need to keep it nice and simple and keep an eye on our key levels as per the below:
7.38 (8th June high)
7.19-7.22 ** (30th May and 21st June former highs forming the shoulders of a potential H&S formation. This resistance is key for the week and we need to see a break above here to see the USDZAR bull run extend)
7.16 – Current Price
7.06 ** (Neckline of the potential H&S formation. Price must stay above this level and a break below would send us sharply down towards the 2007 yearly lows. Just be careful)
7.00 (Key round number level)
6.86 (2007 lows)
Okay, so let’s put it this way for the week. I would be very surprised if we are still trading at 7.16 by Friday so without stating the obvious, there are 2 things that can happen.
- Price breaks above 7.19-7.22
- Price breaks below 7.06
Both of the above would be considered ‘key breaks’ within the medium term trend and are very significant levels based on the current market environment. This is a key week and breaks of these levels could send price very quickly in the direction of the break.
Good luck and all the best for the week ahead.
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