Phew what a week!
In last week’s commentary I mentioned that I felt that the risks for the week ahead were strongly skewed to the downside for USDZAR and all the ZAR cross currency pairs (GBPZAR, EURZAR .etc)
Truth be told I don’t think I stressed my point enough and am probably guilty for not drilling the point home – as I usually tend to overstate rather than understate risk.
There were 2 key risks or events last week which worried me (both of which ended up fulfilling my very worst expectations:
- US Interest Rate Announcement:
The credit crisis currently being experienced in the US led the Federal Reserve to cut interest rates by 0.5% (against an expected 0.25% by the market)
- Continuing Credit Crisis in the UK:
Countrywide, Northern Rock……….who’s next?
The 2 above issues cause a lethal concoction that has ZAR bulls quivering.
Normally what happens is the following: When USDZAR falls (USD weakening) then generally GBPUSD goes up (USD weakening move as well). The USDZAR fall is generally offset by a rising GBPUSD which serves to hold GBPZAR fairly steady. Vice versa for a rising USDZAR.
Now this past week has seen USDZAR fall aggressively on the back of a weaker USD fuelled by a domestic credit crisis in the US as well as the 0.5% interest rate cut serving to make the interest rate differential favouring the ZAR. At the same time GBP has taken a hiding across the board in the market so whilst currencies such as the EUR have been trading at all time highs against the USD, the GBPUSD has actually been falling!
So (1) USDZAR is falling, and (2) GBPUSD is falling as well = GBPZAR getting hammered!
There is presently huge intraday volatility in the foreign exchange markets and a large degree of uncertainty. It’s very difficult to say where the market is going short-term as there’s so much new/uncertain/sometimes untrue information coming to the market every single day that the markets are pretty choppy at the moment.
The one thing I will say is that I still feel that the ZAR is moving weaker within it’s major trend but once again for the week ahead I would play it safe and manage my downside risk. The USD is still under pressure, and the market is still sceptical about the current credit position in the UK. If the market now decides that the UK monetary authorities are going to need to cut interest rates then we could see GBPUSD, and thus GBPZAR, fall even further.
So the risk once again is skewed to the downside this week. USDZAR dipped marginally below the key 7.00 level and it’s imperative that price holds above this level or we could see more serious damage to GBPZAR this week. USDZAR 7.00 needs to hold this week – as simple as that! I don’t see GBPUSD making much upside headway so it’s up to USDZAR to stabilise and start moving up in order for GBPZAR to stay above 14.00
‘Play good defence not offence’ – the risk is to the downside this week.
Good luck and all the best for the week ahead.
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