2 July 2007
Right folks, we’re back to square one and being a ZAR bear myself I’m a bit worried. Truth be told as much as I’m a ZAR bear (expecting the ZAR to weaken) I would now be sitting long ZAR if I was trading it.
There’s a difference between your opinion and what the market is telling you – and right now the ZAR is screaming out ‘Buy me!’
Last week saw the release of higher than expected PPI and CPI figures once again fuelling the inflationary fire within the SA market but this was slightly offset by an improved trade deficit coming in significantly below expectations.
There are currently 2 things playing out in the ZAR market at the moment:
- The expectation of higher interest rates, and
- A very, very weak USD over the past week which has seen the USD once again pushing for major yearly lows across the board
I personally find it pretty suprising that in a country where the public sector has virtually ground to a halt over pay disputes and with utilities staff threatening to put SA in the dark – that anyone in their right minds would want to buy ZAR. But that’s neither here nor there. The fact of the matter is that guys are buying ZAR, and buying it pretty aggressively at the moment. In fact, I would even be surprised if the traders who are buying ZAR even know, or care for that matter, that a strike is actually taking place? Hah hah. I’m really not joking. I’ve met a load of really big offshore traders and the okes are clueless.
Technical Commentary
Last week I mentioned a ‘potential scenario’ that could play out and that I was keeping a close eye on. For ZAR bears like myself, this pattern is a major worry as it theoretically sends us below the 2007 lows at 6.86. This scenario has since played itself out and the charts have formed a fairly large Head and Shoulders top with the break of strong support at 7.06.
The next bad news from a technical perspective is that this H&S formation forms part of a massive multi-year H&S with a neckline around 6.86.
So here’s the story as it currently stands – if 6.86 breaks as expected from the current H&S then this also confirms a much larger H&S formation with massive downside potential (somewhere back in the 5’s!)
Okay, so this all sounds a bit pessimistic (even for me!) but I’m just trying to tell you what the charts may be showing us. Let’s forget about the long term and keep our focus on the next week.
If you were to ask me exactly what I thought USDZAR would do this week I would say as follows – following the downside break of 7.06 I would expect us to test the big figure at 7.00. From here I would expect a little correction back to 7.06. This is a key move in any H&S pattern where the market would be expected to find sellers once again around the 7.06 level. These sellers should then force the market below the 7.00 level and down towards 6.86.
So let’s see how it plays out this week. The key move is the correction back to 7.06 where all ZAR bears need to be holding thumbs that price breaks above this level which will reject the entire pattern.
The only good news that I’m holding onto at the moment is that the ZAR has rejected a lot of good breakouts over the past few months and just when you’re convinced it’s going in one direction, it just zips the other way.
…….but don’t play your cards on ‘hope’. Right now the market is shouting ‘buy ZAR’ so just be careful is all I say.
Our key levels this week are as follows:
7.19-7.22 ** (30th May and 21st June former highs forming the shoulders of a potential H&S formation. Also last week’s high tested before dropping down aggressively through 7.06)
7.06 ** (Neckline of the H&S formation. Price must stay below this level which would send us sharply down towards the 2007 yearly lows. I expect a retest of this level before moving lower)
7.03 – Current Price
7.00 (Key round number level)
6.86 (2007 lows)
View for the week is therefore USDZAR bearish which should drag down the crosses as well (GBPZAR, EURZAR .etc)
Good luck and all the best for the week ahead.
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