WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 3 September 2007
Once again USDZAR, after showing so much promise for a strong move higher on the break above the former 2007 high at 7.54, we are back in the middle of the 2007 trading range at 7.15.
Looking at a weekly chart for 2007 USDZAR has actually been very, very quiet within the major trend trading very flat for the year within a 6.78-7.60 band.
It’s a pretty tough market to call at the moment with intraweek moves within the medium term trend being fairly volatile exhibiting 30-40 cent swings but unfortunately the major trend seems to be going nowhere at the moment.
My personal opinion is that we are still inching higher within this major trend and slowly working towards a weaker ZAR over the next 6-12 months.
There are without question underlying economic problems in the SA economy coupled with an uncertain future political landscape which I don’t believe has been factored into the value of the ZAR at the moment.
As an example, I’ve just been back in SA for a month or so and there is no way that prices are only 5-6% higher now than they were a year ago. Beer prices for my wedding went up 23% in just 6 months! It seems to me that the SA economy (analysts, economists and the government) are in a state of denial as to the true inflation rate being experienced at ground level in South Africa.
I’ve mentioned in previous commentaries about the difference between Western central banks and the Reserve Bank. The former take a forward thinking, conservative, softly softly approach whereas the SARB are ‘laggers’, ‘after the factors’ way behind the curve. We were too busy high-fiving each other when the ZAR was trading 5.60 with growth levels nice and strong that we seemed to forget that the low interest rates coupled with a soon to weaken ZAR would eventually filter into the economy and create the exact problems we are currently experiencing. They all got so excited that they lost sight of the bigger picture and all logical, rational thought process.
It’s like that 6 year old kid dribbling a soccer ball shouting to his dad ‘Hey, look at me!’ before smacking straight into the goalposts. He gets so excited and caught up in the moment that he forgets that the score is still 0-0 until the ball is in the back of the net.
So it’s a little like our Reserve Bank two years ago – inflation was ‘supposedly’ within the 4-6% target range (if you believe that then good for you!), growth was strong, interest rates were at their lowest levels in ages, the ZAR was strong, trade balance was satisfactory. Hey man, things were looking pretty good back then. In fact, it deserved a few high-fives but it seemed that we maybe lost sight of the fact that the ball wasn’t yet in the net, and there was still one more defender and a goalkeeper to beat.
So anyway, it seems that the economy is now feeling the heat of this over-exuberance. Low interest rates coupled with a weakening ZAR serve up a nice little concoction of the following:
- Inflationary pressure (which eventually forces interest rates up)
- Pressure on the trade balance
It seems that in the short-term interest rates are bound to go up. Now I’m not saying they ‘should’ go up but what I am saying is that they I suspect that they will go up. Once again this is based on the assumption that the SARB are ‘laggers’ .i.e. they consistently lag the interest rate cycle. They will always drop interest rates too low too quickly, and vice versa raise them too far too fast. They don’t seem to have a genuine feeling for the market and the economy and the timescale of its reactions to monetary policy.
So enough hogwash – two fundamental issues currently affect the ZAR: A rising interest rate cycle supported by a weaker ZAR, and a worrying trade deficit.
Now the problem with this rising interest rate cycle is that at some point it starts affecting growth, which in turn affects confidence in the SA economy, which in turn starts hurting equities, which in turn affects FDI…….employment…….the ZAR .etc. You get the idea.
I suspect that the pace and scale of interest rate increases is going to hurt the SA economy in the next 12-18 months unless the economy is given time to adjust to these higher interest rate levels.
So the bottom line is this: Fundamentally I still feel the SA economy has got problems and I don’t see any convincing reasons to buy ZAR from a fundamental perspective.
Then again, I’m not a fundamental trader but seeing as though the technical picture within the major trend is fairly flat and within the short-term USDZAR is oversold – I would be a buyer of USDZAR (expecting a weakening ZAR from current levels)
At first glance, I think we may have completed a 5th and final wave within the medium term trend so I’m expecting USDZAR to level off this week and start moving higher again within this timeframe. There is strong support within the 7.00-7.10 band and I would be looking for price to hold above these levels before moving higher.
Expect the unexpected though in current volatile trading conditions where the market can easily swing 30-40 cents in a day.
If you need to sell foreign currency then sell on the way up and don’t wait for the market to reverse the other way before panic selling, and vice versa for buyers of foreign currency. Try not to take too many chances at the moment and use your opportunities when they come along to secure good rates as they may not be there the next day!
Our clients have recently been experiencing a lot of missed levels on both sides of the market by trying to pick tops and bottoms (and sometimes being a bit too greedy) but my advice would be to decide beforehand what level you would be happy with and when/if it gets there then take it! Or at least do a percentage of your total amount in order to minimise your risk.
Remember – if you are a registered client you can always call our dealers to secure a rate over the phone as well.
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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