WEEKLY ZAR COMMENTARY – 17 September 2007

If you’re a South African based in the UK then it’s important to be aware of what is going on in the local UK market in order to understand what is happening with GBPZAR.

Generally speaking, the ZAR is always a USDZAR story. Wherever USDZAR goes the rest of the ZAR crosses (GBPZAR, EURZAR .etc) follow. At the moment though we’re faced with a situation where although USDZAR is going up, GBPZAR is dropping like a stone.

This is for the simple reason that the sub-prime woes that have been affecting the US economy, and thus the USD, over the past few months have now filtered into the UK company with high-street mortgage provider Northern Rock in some serious financial difficulty. These mortgage providers are presently facing a liquidity crisis whereby their clients are battling to repay existing mortgages at the high interest rates thus not giving them the required liquidity to offer new mortgages to potential new clients. This problem is now being exacerbated by existing clients standing in long queues outside the banks to withdraw their cash thus worsening the liquidity position of the mortgage house. I heard that £2 Billion has been withdrawn over the past week.

So there’s panic and this panic results in the foreign exchange markets selling GBP like their lives depend on it. GBPUSD has dropped from a last week’s high around 2.0370 to a current low of 1.9950 on the back of these concerns and the anticipation that the Bank of England may need to cut interest rates.

So GBPUSD has dropped very aggressively causing the GBP to weaken across the board, which includes weakening against the ZAR.

So it’s a mixed bag for the moment and I would expect GBPZAR to remain under pressure for most of this week. USDZAR is struggling to break above the 7.23-7.28 resistance band and USD is struggling to find a strong bid in the current market that would drive USDZAR into the 7.30’s. It seems to me that USDZAR should range trade for most of this week (maybe even with a slightly lower bias) with GBPUSD under pressure until the full extent of the sub-prime crisis becomes clearer.

These two issues should cause GBPZAR to trade around current levels to weaker for the remainder of this week and I wouldn’t expect to see any upside fireworks in GBPZAR which will struggle to move much higher this coming week. On a risk/reward basis, the risk is clearly to the downside on GBPZAR for this week as it is impossible to say where or if GBPUSD will bottom out. It could fall even further which would take GBPZAR weaker with it.

Please note that this week GBPZAR will primarily be affected by issues outside of SA such as the UK and US credit crisis, US interest rates announcement tomorrow .etc. It could be extremely volatile but please be aware that the risks for both GBPZAR (large) and USDZAR (minor) are to the downside in the short-term.

Another rate cut in the US could see USDZAR weaken in the short-term and coupled with the new credit crisis in the UK could see the ZAR strengthening significantly this week. Just be aware that this is where the risk lies this week.

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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