There’s nothing like a bit of a surprise interest rate hike to get everyone jumping into the ZAR.

Thursday saw the MPC hike interest rates by 50 basis points to 10.5% which saw USDZAR breaking to new 2007 lows below 6.78

It’s certainly not looking overly pretty for the ZAR bears (like myself) but at the end of the day the current market is like a starving beast hungry for yield.

By this I mean the following: The interest rate cycle in western economies (which tend to lead the SA interest rate curve) has without question turned. Down. We’ve seen the peak in their interest rate cycles and the current credit crisis has enticed the US to cut interest rates aggressively already, with talk of the UK following suite and the rest of the world staying pat at least for the next 6 months or so while this credit squeeze blows over. The thing here is that SA is still in a tightening interest rate cycle which means that there is a yield advantage to buying ZAR and receiving the positive interest rate differential that the ZAR offers. This is a major play in the markets at the moment and Mr. Mboweni should’ve known better.

It’s not that I don’t think that interest rates should be increased but rather that what he should’ve done was have a quick look at a USDZAR graph about 5 minutes before his announcement. If he did this he would’ve noticed that USDZAR was trading at just a few cents above the 2007 low and an unexpected hike in interest rates would certainly lead to a massive bout of short-term ZAR buying which would’ve forced USDZAR to new lows thus triggering stop loss orders all the way down to 6.70 – which is exactly what the market did! And this break below 6.78 opens up the potential to fall far…..very far.

The SA government has been saying they want a weak Rand but hitting the market with a surprise interest rate increase when we are trading right on the 2007 lows is like shooting yourself in the foot.

Now I’ve always stated that SA’s actual inflation is much higher than that reported by the government, analysts, lackeys .etc. BUT in this particular case I would’ve maybe held out for the sole reason that the SA government needs a weak ZAR to stimulate domestic growth, create jobs, increase manufacturing sector……

Forcing USDZAR to new 2007 lows by surprising the market with an interest rate hike is not the wisest thing to do if you want any hope of a weaker ZAR.

The problem here is that the structural damage to the USDZAR market by forcing it to new yearly lows is irreparable in the short-term. Sure, most people click onto their favorite website to see where the ZAR is trading and see 6.75, 13.75 and 9.55 but the story is much deeper than that. A downside break to new lows breaks the entire foundation that has been laid by ZAR bears over the past year or so. It’s like tearing a hammie 20 metres short of the finish in the 200! It’s a problem and not an easy one to recover from.

So the bottom line is this: If I was Tito I would not have hiked rates purely because we were so close to the 2007 low and any hike was going to hurt the market badly. And that’s exactly what happened.

If we were trading at 7.20 then I would’ve said ‘go for it’ as it was the right thing to do but it’s important to take everything into consideration when making such vital decisions.

Let me also run another theory by you quickly: A strong ZAR serves to suppress inflationary pressures. A few weeks ago we were trading at 7.30 and 14.50 in USDZAR and GBPZAR respectively. Since then the ZAR has strengthened significantly meaning that the inflationary outlook based on current ZAR levels is not the same as it was a few weeks ago. Right? Now what we’ve done is give the SA market a double whammy because we’ve increased interest rates in a relatively stronger ZAR market environment which will serve to make the ZAR even stronger – which will ultimately serve to effectively hit the market with a 100-150 basis points ‘effective’ interest rate hike! Make sense?

A strong ZAR and an interest rate hike together serve to have twice the intended effect of just one or the other. Both at the same time may hit the market twice.

So this is where I’ve always had a problem with the SARB. They’re always behind the curve. Laggers. Can’t see beyond their noses and no foresight whatsoever. Why is it that Western economies move interest rates 25 basis points at a time very slowly over a prolonged period BUT the SARB cut interest rates likes they’re sawing down trees and then try rebuild the forest (increase interest rates) in 6-12 months. Like I say, behind the curve which doesn’t serve to provide stability for the local SA economy (jobs, housing and the domestic markets)

So this is my take on things. Finally a few technical levels to keep an eye on this coming week:

6.78 – Former 2007 low now resistance (need to see price push above this level for downside pressure to ease. Below this level the price is susceptible to fall sharply next week)
Current Price – 6.75

As you can see I have no levels on the downside as the break below 6.78 opens up the downside in a big way. I’m not going to make up levels for the sake of it. Bottom line is that all you need to keep your eye on for the week ahead is 6.78 which is the key pivot level. Price needs to move up above this level which could see some weak shorts scrambling to cover their positions. This could create a false breakout scenario which could see us bounce. This is the only scenario I’m on the lookout for this week. If price does not break above 6.78 this coming week, then kick back, relax and enjoy the ride……..down!

Good luck and all the best for the week ahead.

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