WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 18 Feb 2007
SARB leaves interest rates unchanged!
………or did Mr. Mbeki? Hah hah.
Lots of debate at the moment about the independence of the Monetary Policy Committee as it has been suggested this week that the SA government are trying to orchestrate a weaker ZAR.
The issue here is whether the government put pressure on the MPC not to raise interest rates in order to specifically weaken the ZAR.
The MPC have always been completely independent (and probably still are) but there is a perception in the market now that the MPC’s hand was ‘tweaked’ by the government in order to weaken the ZAR, thus strengthening the export sector, creating jobs .etc. They seem to have finally woken up to the fact that a weaker ZAR benefits the SA economy by making our goods cheaper, boosting exports, growing the local economy and manufacturing sector, and thus creating much needed jobs. Simple economics – but pretty simple logic as well I suppose.
As it turns out, the government now have some Harvard guys consulting to them who have said that the ZAR is overvalued at current levels. That’s pretty amazing as I’m sure everyone was championing the strong ZAR 6 months ago and telling us how the ZAR is reflecting the great SA economy blah, blah, blah. Some even suggested the ZAR was still slightly undervalued at USDZAR 6.00! Amazing, these guys are all supposedly reading from the book but come up with completely different valuation. Based on what? Probably a thumb suck if you ask me.
The good old’ thumb suck is always the last resort and sometimes even works. The theory is that if you have 1,000 financial market experts all sucking their thumbs, then purely through the laws of statistical probability at least 10 or 20 would guess right! Are these 10 or 20 lucky or skilful? I’ll let you decide but the moral of the story is don’t believe anything you hear. Even if it comes from an ‘expert’.
Who really cares anyway?
Talk is cheap and ultimately the ZAR does whatever it wants to do irrespective of the ranting and raving of governments, financial market experts and guys like me. You could get 1000 very persuasive arguments why the ZAR should strengthen, and similarly, why it should weaken. Only the statistically lucky, and the truly great financial market practitioners (and these can be counted on one hand – and I’m not one of them!), get it right.
At the end of the day though – price is the sole truth and never lies.
I do think though that the MPC’s independence is in question at the moment. Perceived or real? I would go for ‘perceived’ but either way a bit of damage has been done and the seed has been planted in the brains of traders worldwide.
Take these excerpts from a report this week:
‘The SA government was considering a ‘menu of options’ to tackle the
Volatility of the South African Rand’
By the way – at the top of that list is interest rates. Theoretically, lower interest rates = weaker ZAR.
‘There was a school of thought that higher inflation would result in a weaker ZAR’
And the way to increase inflation is to lower interest rates or keep them steady in an inflationary environment.
There’s no question that the ZAR has been flagged by the upper echelons of government and it’s raised its profile slightly and is now high up on the ‘to do list’.
I don’t know but maybe it goes a little like this: The country is crying out about crime, Mbeki’s under pressure to do something, the government blames poverty for the high level of crime (Mmmmm….), so they need to create more jobs, but the strong ZAR is hampering domestic growth and thus employment – so let’s weaken the ZAR, grow the local economy, create more jobs, and crime will disappear!
I somehow don’t think so…….but I guess that’s the thinking (or lack thereof) behind it.
So the government now wants a weaker ZAR and, truth be told, that’s a pretty compelling proposition for ZAR bears to start selling. You know for sure that you’ve got the backing of the SA reserve bank currency traders who are going to be buying USD like their lives depend on it (and probably defending a lot of the support levels mentioned below).
Technical Commentary:
The moment of truth is on its way for the ZAR.
USDZAR has traded a fairly narrow 7.09 – 7.39 range since the beginning of the year and is looking close to a major breakout.
There are currently two patterns dominating the technical outlook:
- The first is a massive potential Head and Shoulders pattern within the major trend that can’t be seen on the daily chart attached but trust me it’s there. This particular pattern (if fulfilled) points to a huge downside move in USDZAR back down towards the USDZAR 6.00 level
Now no need to panic just yet. I’ve specifically used the word ‘potential’ because that’s exactly what any technical pattern is until it is confirmed. It’s important though to be aware of these ‘potential patterns’ before the occur so that you can plan for them if they do end up happening.
The confirmation signal that a head and shoulders pattern has been completed is a downside break below what is called the ‘neckline’ which comes in just under USDZAR 7.00. This level, therefore, becomes another key support level on the downside that price needs to hold above in order to go higher.
Also be aware that this particular pattern has formed within the major trend which means that it won’t happen tomorrow, and would occur over a period of time – BUT – if it does confirm the pattern you will see a significant move to the downside.
Just be aware that this ‘potential’ pattern is busy forming.
- The second, more immediate, pattern that I’m watching (as indicated by the converging yellow lines in the chart) is a triangle that is being formed between USDZAR 7.39 and 7.09. This is the key pattern of the moment. Price has traded within this triangle since the beginning of the year and the market is now heading for a serious breakout. The bias is tilted to a topside breakout as the market is very well supported on the bottom with strong support at 7.14, 7.09 and 7.00 and triangles are also generally continuation patterns. The bottom of the triangle comes in at 7.14 and the top at 7.29. A break outside of these prices will give a good indication of where the market could go in the short to medium term.
So the market is very evenly balanced at the moment with the current focus on the triangle formation indicated. This is key over the next few days as the market gears up for a big move. A break of either side should see a fairly powerful move in the direction of the breakout.
The major risk is for a downside breakout as that brings the Head and Shoulders pattern described above within shooting range. A break of the neckline at 6.95-7.00 is going to trigger massive selling and a large move downwards.
The fundamental picture though is not ZAR supportive with interest rates being held steady and a ‘perceived’ political intervention in the ZAR market whereby the SA government are being seen to be trying to orchestrate a weaker ZAR.
These factors are key to whether the market decides to push higher or lower in the next few days.
Hold onto your horses though ‘cos when those gates open the ZAR is going to bolt. Just be prepared for a major move very soon.
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