And the winner is…………………Technicals! Yay.
Last week I mentioned that there was a good fight taking place between the USDZAR bearish technicals and the USDZAR bullish fundamentals.
This week proves that you can argue about the economic fundamentals, state of the economy .etc. til you’re blue in the face but at the end of the day there is only one thing of any importance in the financial markets – PRICE!
Price action is the only true reflection of what the market is trying to do and where it wants to go. It is unbiased and is the sole truth represented by the markets. For all the hoo-hah in market analytics and commentaries, at the end of the day it boils down to one thing – PRICE
What did price do this past week? ZAR strengthened
Where is the ZAR currently trading? 6.82
Did we break above or below key levels? Below key levels indicating ZAR strength
My heart and mind is still struggling to see how the current ZAR economic fundamentals justify buying ZAR but this matters not. The market is buying ZAR and couldn’t give a hoot what I think.
So there we have it. The Head and Shoulders technical pattern that I’ve been mentioning the past few weeks is now playing itself out perfectly. This particular pattern would be termed a ‘classic’ H&S because it has formed perfectly, and every movement has been in accordance with a classic type H&S pattern. This is the dominating pattern on USDZAR at the moment so I’ll keep focus on this.
This H&S pattern has now been reinforced by a break below the 2007 lows at 6.86. It’s a worrying picture for ZAR bears.
Our minimum downside objective is around 6.74 and I would expect us to test this level at some stage this week.
Now once again this is also a major USD story with the $ trading at all time and multi-decade lows against most currencies. There just seems to be no end to the USD selling and it seems that this has added to the offered tone in USDZAR and probably helped push it below 6.86. There is always a reason why a particular currency does what it does but this does not detract from the fact that USDZAR is trading at yearly lows and is now in the process of completing a rather large H&S pattern with a minimum downside objective of 6.74.
Just be careful is all I say. For those with a longer term horizon – please bear in mind that we are potentially currently playing out a H&S pattern within a major H&S pattern with downside objectives below the lows at 5.60! Not the word ‘potentially’. I used this word about a month ago when I spotted that we may be in the process of forming our current H&S pattern which has now played itself out perfectly. Don’t be an ‘after the fact’ type investor. You’ve got to spot and identify these ‘potential’ moves well before they happen.
Fundamentally, I still believe that the SA economy has underlying fundamental problems but my other concern is that as interest rates increase in SA (predicted to go to 10% shortly) so does the ‘carry trade’ potential improve. The carry trade is where traders borrow money in low yielding currencies such as the Yen and Swiss Franc and invest in high yielding currencies such as GBP. AUD. NZD, ZAR. It seems that when interest rates in SA were 7-8% that this yield advantage wasn’t enough to offset the risk associated with holding ZAR but at 10% and higher this may change which could strengthen the ZAR significantly.
At what point do interest rates in SA get high enough to justify taking on the risk of holding ZAR for the higher yield? I would imagine that at 10% and higher this type of ‘ZAR denominated carry trade’ looks pretty good particularly with Gold looking very strong of late.
So what I’m saying is simply this: The dominant force in the ZAR market is now a ZAR bullish H&S pattern supported by rising interest rates and commodity prices, which should see the ZAR strengthen over the near term.
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)
6.86 (2007 lows – price now needs to establish itself below this level in order to move down confidently)
6.92 - Current Price
6.74 (Minimum downside objective of H&S pattern)
PLEASE NOTE THAT WE ARE ALSO NOW DOING VERY SHORT COMMENTARIES ON OUR WEBSITE WWW.EXCHANGE4FREE.CO.UK THROUGHOUT THE WEEK PROVIDING UPDATES ON THE INTRADAY MOVES ON THE ZAR AS WELL AS REALTIME ANALYSIS KEEPING YOU IN TOUCH WITH MOVES AND IDEAS ON THE ZAR.
Good luck and all the best for the week ahead.
Please do not hesitate to call Exchange4free for any advice or foreign exchange related queries.
08456521022
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