WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 25 Feb 2007
So the budget came and went without any major surprises on the foreign exchange front. Nothing groundbreaking, nothing too exciting – except that it looks like SAFEX will now offer ZAR futures. This could represent pretty interesting opportunities, both for importers and exporters, as well as for ZAR traders. It’s going to be interesting to see the terms of these futures contracts as they may open up opportunities to make corporate hedging cheaper and more efficient.
Let’s see.
I had a pretty interesting evening this past week with some rather influential emerging market traders. So naturally the conversation moved towards a little bit of ‘Rand chat’ and you know what I found out?
These guys know almost nothing about South Africa. Nothing, jack, zippo, zero.
I always knew it but this fateful evening proved what I long suspected. These guys are punting horrendous amounts on the ZAR but don’t know much about the intricacies of South Africa.
Truth be told……they couldn’t care either.
They’re in the game for one thing and one thing only. To make money!
So this brings me to a new little conspiracy theory of mine and rather relevant post-budget I suppose where we haven’t seen much in terms of removing exchange control regulations.
So try this one out for size!
The SA government has always said that they have kept exchange control regulations in place to limit offshore speculation on the ZAR, and unnecessary manipulation on the currency. Wake up and smell the coffee chaps.
$10-15 Billion is traded through the ZAR every single day of which an estimated 70% takes place offshore. These guys are not hedging corporate exposures – they are trading, speculating and manipulating.
So the supposed reason for having exchange control regulations is pretty invalid. Guys are going hammer and tong on the Rand out here and there is nothing the SA government can do about it.
So why have exchange controls anymore?
Ignoring the fact that it is a job creation exercise, the conspiracy theorist in me thinks that maybe the SA government aren’t really trying to keep foreign speculators out of the ZAR but they are actually trying to keep the local market in check.
Who has the best knowledge of what’s actually happening in SA and the intricacies of the SA market? It’s the locals.
Funny that. So the guys, who are actually experiencing 10% + inflation .blah blah blah, are the only okes who aren’t allowed to speculate on the ZAR. Very strange.
So a little tweak here and a little tweak there and all of a sudden the SA government is painting a rosier picture to foreigners than what people are actually experiencing in SA.
So everyone in SA throws their hands up saying that they can’t believe inflation is only at 5% and where do these numbers come from – but at the end of the day there’s nothing they can do about it. The exchange control regulations that are in place are maybe there so South African ZAR traders aren’t allowed to express their right to sell ZAR.
Meanwhile my mates out here read a quick headline, maybe something like ‘SA inflation down’ and decide to buy a few hundred million dollars worth of ZAR.
Very clever I think.
If I was in SA and had the option I would be selling ZAR – no question.
The problem is that I’m not in SA and even if I was, there is nothing I can do about it except join the rest of the country, throw my arms up in the air and say ‘Who actually believes this cr*p?’ – It seems that foreigners and offshore traders do and they can buy a lot more ZAR than us.
Technical Commentary
Technically, we’ve got a serious problem on our hands.
The facts are as follows:
USDZAR has broken below the bottom of the 2007 triangle, and price is now also trading below the 200 and 50 Day Moving Averages at 7.16 and 7.14 respectively.
Technicals are pointing one way I’m afraid – and that’s down.
There’s nothing from a technical perspective now that is pointing towards USDZAR going higher.
The next problem is that massive Head and Shoulders pattern that is forming on the daily charts. It’s huge and the market knows it. The same traders that I had drinks with this past week are all well aware of it and watching it like hawks. A break below the neckline around USDZAR 7.00 and there’s no question that momentum accounts will start buying ZAR for a move down to the low 6’s.
The only thing that could save the USDZAR from this fate is some serious reserve bank intervention to try keeping this market above the USDZAR 7.00 level. Will it work? Only for a while but if the reserve bank can keep price above 7.00 for a while longer then some politician is bound to say something stupid or some weak economic indicator may save us.
But either way the writing is on the wall and USDZAR at this stage is showing signs of falling further. This will take GBPZAR down with it pretty fast so just be on the lookout for a break below USDZAR 7.00 as this will signal a large downwards move.
This week will determine the moves over the next few months and we need a serious reversal upwards in USDZAR in the next week days or it’s going to be goodnight sweetheart.
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