WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 6 August 2007
There seems to be only one way to describe the foreign exchange markets at the moment: Volatile!
……and extremely difficult to trade.
There are a host of issues affecting the FX markets at the moment which are now spilling into the ZAR market and contributing to a weakening of the South African Rand.
A week or so ago USDZAR was in the process of pushing to new 2007 lows at 6.80 on the back of a completing Head and Shoulders pattern which theoretically should have pushed us even lower towards 6.70 at least. This pattern and new lows at 6.80 have since been strongly rejected with price being aggressively pushed up to 7.22 at the beginning of last week (7.22 also just happens to be the shoulder levels, which will now provide resistance, of this head and shoulders pattern)
Now the one key thing to look out for on any move to new lows is whether the market can sustain those lows. The theory is pretty sound in that most traders usually wait for the market to make new lows before deciding to sell for the move lower. This explains why markets often move very quickly once they form new lows or highs as the market generally waits for the new high/low to print before deciding to buy/sell.
The fact that we dipped under the former 6.86 lows and the ZAR was then aggressively sold back up to 7.22 tells you something simple: Traders in fact were not waiting to sell below the new lows but instead were waiting to buy! Now the word ‘waiting’ is important to me here as it implies that the underlying bias in trader psychology in the ZAR market must be that of a ZAR bearish view .ie. wanting to buy USDZAR once it drops to new lows. This tells me that much of the previous ZAR strength could be explained by the assumption that ZAR bears were rather looking for better levels to sell ZAR as opposed to ZAR buyers being dominant within the medium term trend.
Well that’s my theory anyway and always pretty easy to say something clever after the fact and once the market has moved.
Key for me towards the end of this week was once again that USDZAR went up whilst the USD suffered across the board. In layman’s terms: The market was selling USD against most currencies whilst buying USD against the ZAR. Simply put, the ZAR was trading weaker against the USD which was getting pummelled left right and centre. Clearly tells us that the market would rather currently buy USD than ZAR!
Just a few quick issues contributing to the weaker ZAR picture this week:
- There is fairly strong emerging market risk aversion at the moment with high-yield emerging market currencies such as the ZAR being affected by the unwinding of carry trades (when an investor borrows money in low yielding currencies to invest in high yielding currencies such as the ZAR – when this trade unwinds it unwinds quickly as guys look to exit their long ZAR positions)
- The AUD being affecting locally by sub-prime concerns (similar to the US) which invariably has a negative effect on similar commodity currencies such as the ZAR
- Global equity markets taking a smack
Finally, from an economic perspective if anyone is interested, the SA trade deficit increased to 5.3Bln. This figure is like a stuck record but the key here is that it’s a record that’s always playing a ‘deficit’ tune. In theory, this deficit should be improving on the back of a weaker ZAR but it isn’t. Once again, these figures as well as the worsening (yet under reported) inflationary figures seem to be pointing towards an underlying weakness in the SA economy that I believe still has to rear it’s ugly head.
So just a few quick technicals this week. Just going to focus on important levels to watch this week as realistically, and without getting over excited, we’re still trading within a pretty narrow bank for the 2007 year with not a great deal going on within the major trend:
6.22 - Short-term high should provide strong resistance for the week but a break above will signal a new move higher and the potential for ZAR crosses to move to new multi-year highs. Watch this level carefully this coming week as ZAR needs to break above it to keep this upmove going and avoid the usual stall and trace back to 7.00
6.13 – Current Price
7.06 – former resistance turned support and neckline of rejected H&S pattern. Price ideally needs to hold above here
7.00 – Big figure psychological level
6.80 – 2007 lows
I would be looking for price to hold above 7.06 this week and watching for a break above 7.22. These are your key short-term levels and a break either side should signal your next directional move over the next few weeks.
Good luck and all the best for the week ahead.
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