Howzit my China!

There are some things in the markets that you just can’t predict and unfortunately for those of us championing a weaker ZAR it has not been a great week. Not a great week would be the understatement of the year: It’s been pretty horrible actually.

Everything is pointing to a strong ZAR and it looks like the tone is now set going into year end and our good friend the ZAR is flexing his muscles.

The ZAR’s strength can be primarily attributed to one word: China.

There have been 2 major stories this week which have served to strengthen the ZAR significantly. Firstly, Standard Bank have sold a 20% stake to the Industrial and Commercial Bank of China (The world’s largest bank by market capitalisation) and secondly, there are new rumours of a similar deal from a Chinese suitor for MTN. How do these Chinese firms pay for such a deal? In ZAR of course. They need to buy ZAR to pay these huge acquisitions and I’m afraid to say that the market is onto these stories like a bunch of vultures circling a kill. We played out a similar scenario whilst the Barclays/ABSA deal was being brokered and I suspect that for the next while we will have the same market action playing itself out over the next few months: ZAR strength.

There are other issues playing themselves out in the markets at the moment and I’m afraid to say it’s a ZAR positive story out there.

- Once again inflationary figures came in above expectations triggering an expectation of another 0.5% interest rate increase in December. This puts the ‘carry trade’ strongly in the ZAR’s favour as the positive interest rate differential from holding long ZAR positions continues to be an attractive trade as investors seek to invest in high yielding currencies.
- High commodity prices: Gold is going through the roof and oil has traded above $90 a barrel. This is extremely favourable for commodity currencies such as the CAD, AUD and of course the ZAR
- Better emerging market sentiment
- An extremely weak USD. The USD is simply getting hammered. A lot of the ZAR strength can be attributed to the weak USD which is serving to exacerbate the recent ZAR moves

So as it stands at the moment, it’s a very ZAR friendly environment with the market being hit by a lot of ZAR positive news and data all at once. It’s like a game of truth or dare – let’s just get it all out on the table, all at once, in one foul swoop! The market has been swamped this past week by a ton of unexpected ZAR positive data. There is only way for the market to react when this happens: ZAR strengthens.

Technical Commentary

Unfortunately, in addition the very positive fundamental outlook on the ZAR, the technical position is looking just as strong.

What we have seen is classic breakout price action with USDZAR breaking to new 2007 lows, dropping off 10 cents, retracing back to the former lows now resistance at 6.80, then finding sellers willing to push price all the way down to 6.50. This is classic breakout price action and last week I was hoping it could be a ‘false breakout’.

Unfortunately as the news of the Standard Bank takeover started coming out there was only one way to go and every dog and his uncle jumped on the bandwagon.

USDZAR and corresponding crosses is strongly skewed to the downside and the pressure is on.

It’s simply looking very ugly for ZAR bears but unfortunately there are times when you get blindsided by the market and get caught on the wrong side.

Keep an eye on the market as it is extremely volatile at the moment and very much a news driven environment changing on a daily basis. Keep an eye out and be on your toes this week as we could see further ZAR strengthening moves.

Good luck and all the best for the week ahead.

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