Right okes, nothing really exciting to write about this week. No news I suppose is good news (or the calm before the storm).
So there are 2 very conflicting points schools of thought on the ZAR at the moment:
Fundamental
It’s funny that I seem to hear the same thing from people all the time ‘The South African economy is flying’, ‘The last time I was back I just couldn’t believe the amount of growth, new buildings .etc.’. I couldn’t agree more but it’s important to differentiate between the past and the future.
The one absolute fact of the markets is that they are ‘forward looking’. I suppose some sort of variation of an expectations type hypothesis.
What this basically means is that the superb growth rates in SA, and all these wonderful buildings coupled with economic expansion were priced into the ZAR years ago. You could even say that the strengthening of USDZAR from 13.00 down to 5.60 was on the basis of a ‘forward looking’ view that the market took on the South African economy.
So there’s no point on telling me to look around me and see how well the SA economy is doing because that accelerated growth phase was priced into the value of the ZAR yonks ago.
Some will say that markets reflect a 12-18 month forward looking time horizon. Based on this our question needs to be ‘Where do we see the SA economy in 12-18 months?’
Simply put.
- Do you see the economy stronger in 18 months time than it is now? Probably not
- Do you see the political situation more or less stable than it currently is? With a major power struggle developing within the ANC I think not.
- Is the current cycle of rising interest rates going to slow the SA economy down? Absolutely
- What effect does this have on employment? Not a great effect
Hey look, I’m not the profit of doom here but I think it’s pretty clear that SA has had a really good run over the past 3-5 years and we’re now moving into a slower growth and expansion cycle coupled with economic and political uncertainty.
It seems to me then that from a fundamental perspective the ZAR is without question a nice little sell.
* PS – article out this weekend saying that they are thinking of pegging the Zim Dollar to the ZAR. Who cares you say because Namibia and Swaziland have their currencies pegged to the ZAR and this type of arrangement doesn’t affect the value of the ZAR? Correct it doesn’t. At first glance who really cares if their currency moves in line with the ZAR? The problem here lies with the principle of ‘association’ versus ‘dissociation’ and whether we should be closely aligning (associating) our economy with that of Zim’s or staying as far the heck away as possible (dissociating). I don’t think that even requires an answer but clearly our chommies at the reserve bank think it’s something worth considering.
Technical Commentary
Technically speaking, we have completed a large Head and Shoulders pattern and unless USDZAR can move above 7.05 I’m afraid it’s time to say good night to USDZAR. Currently, the ZAR is a buy from a technical perspective.
Most people won’t know or care what an H&S pattern is (neither do I by the way as I’m not a fan of this technical jargon rubbish) but what you do need to know is that this pattern is extremely powerful and has an objective well below the 2007 lows at 6.86.
That’s all that I’m going to say for the moment in terms of the technical outlook on USDZAR as that is the dominant pattern that’s playing itself out at the moment.
I do think though that we need to see something happen in USDZAR this week or we’re in trouble. Basically it needs to bounce and clear 7.05 soon or technically we’re in major trouble.
Keep an eye on our key levels this week as per the below:
7.05 ** (Neckline of the H&S pattern and former lows now resistance – need this level to break this week and a good break above will be a very positive sign for USDZAR bulls)
6.97 – Current Price
6.93 (Last week’s low – need this level to hold this week so we form higher lows in consecutive weeks. If this breaks we will go down to test 6.86)
6.86 (2007 lows)
Okay, so let’s put it this way for the week.
Short-term I would keep a very, very close eye on 6.93 on the bottom and 7.05 on the top. A break of either of these levels triggers a short-term directional move for the rest of the week.
So unfortunately we’re currently stuck between a clear ZAR sell from a fundamental perspective and a ZAR buy from a technical perspective – which makes for another interesting week!
PS – the ZAR is not one of the most volatile currencies in the world for nothing!
Good luck and all the best for the week ahead.
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