Once again the financial markets (equity, foreign exchange and bonds) are experiencing hugely volatile trading conditions characterised by large intraday swings. This volatility and uncertainty is the direct result of the credit crisis currently plaguing the global financial system.
Just to reiterate what has been happening: The US is currently facing a domestic credit crisis on their sub-prime mortgage market which represents around 30-40% of their entire mortgage market. Basically, with interest rates at a cyclical peak both in the US (and globally) there is now a credit crunch whereby people are unable to pay off these high-yield mortgages. It started in the US a few months ago and the threat is now starting to filter into the global economy.
The market seems unable to decide whether the threat to the global economy outside the US is ‘real’ or ‘perceived’ but either way there is uncertainty over what is going to happen over the next few months. It is said that when the US sneezes the rest of the world catches a cold and that is the current worry in the financial markets. Both uncertainty and worry create VOLATILITY.
In the past week the USD has taken a severe beating trading close to the multi-year lows from a few months ago. There is very little good news coming out of the US at the moment with Friday’s employment data coming in well below expectations of up 100K new jobs to down 4K. The USD was sold aggressively on the back of this disappointing data and is currently under huge pressure being sold massively over the past couple of weeks.
It’s always important to consider the theory of ‘relativity’ when looking at the financial markets and the health of a particular economy, market or currency.
The theory goes a little something like this: If A is strengthening versus B then clearly A is stronger than B. If B is weakening against C but at a slower rate than A then C is stronger the B but weaker than A. Ha ha. Hope that makes sense.
So here’s what’s happening: The USD is getting smashed across the board with pretty much every single currency strengthening against the USD, except the ZAR. The ZAR is in fact weakening against the USD which logically tells us that traders would currently rather ‘buy USD’ than ‘buy ZAR’ which is strange seeing as though the USD is extremely weak and being sold across the board. Does the market maybe know something we don’t?
This theory of relativity and its application to the financial markets can give us subtle clues as to whether we should buy or sell a particular currency and it seems that the fact that the USD is strengthening against the ZAR in an extremely weak USD environment then it maybe tells us that there is a problem with the ZAR at the moment.
Late Friday evening USDZAR moved weaker to 7.27 from an opening level for the week of around 7.13.
GBPZAR is also pushing 14.70 and moving towards 2007 highs. It may even be possible in the next few weeks to see a break above 15.00 and this is where I believe we are slowly but surely moving towards.
I will warn though that it was around this time last year when the ZAR got sold off very aggressively and we nearly went above 15.00. At the time every dog and his uncle was calling a level of GBPZAR 20 at the end of 2006. It’s a good time to put everything into perspective here. It can take a long long time for the market to move so don’t expect miracles particularly within the current volatile trading conditions.
As mentioned last week, try not to be too greedy. These are presently very good levels to convert GBP to ZAR so don’t be too greedy as there is a lot of uncertainty in the markets at the moment and almost anything can happen.
Sell GBP on the way up and don’t wait for the market to reverse and start dropping like a fly before deciding to sell in panic. If you were asked 2 months ago if you would be happy with a rate of 14.50 you would’ve gone for it. Now that we are there it would be prudent to be looking to convert at least some of your foreign currency at these levels, and maybe save some on the side in case we shoot a bit higher.
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.
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