We are presently seeing some stabilizing price action in USDZAR but at the end of the day it’s still a USD story out there.

The USD is still trading at and very near to all-time lows against the Euro and multi-decade lows against everything else amid continuing concerns over the US credit crisis. There are still major concerns persisting within the US economy with even a far better than anticipated employment figures on Friday failing to give the USD any strength as it dropped further to new all time lows versus the Euro.

One trading rule is that if positive news comes out and a security is unable to go up then the market is telling you that there is a fundamental underlying weakness in that security, so SELL.

Now it’s important to note that the USD has been on a persistent downward spiral for the past 6 months and at some point that move needs to find a level at which it decides it is weak enough. It can’t just continue to keep falling indefinitely and it seems that the market is in the process of taking a breather and deciding whether current levels are low enough to reflect the expected market value of the USD.

So we have seen the USD stabilize in the short-term against most currency pairs, including the ZAR, and it is the next move that is key to understanding how the market views the USD in the medium term. Is it still considered to be overvalued given current conditions in the US economy? Has the market perhaps gotten ahead of itself and oversold the USD beyond reasonable valuation levels?

These are all questions that will be answered shortly.

And this answer comes in the form of the following: Will USDZAR break to a new low below 6.45 support, or will it break to a new short-term high above 6.64?

The former will provide new momentum for the USDZAR to fall even further (and for the ZAR to strengthen), and the latter will put a short-term bottom in place at 6.45 and ease the downside pressure on USDZAR.

So these become our key levels for the week.

I’m not the biggest fan of the ZAR at the moment as I don’t believe the strength of the current SA economy is fairly reflected in present ZAR valuations. The strength of the ZAR of late can be attributed to the following:

- Chinese investment in SA economy
- Large carry trade with ZAR yields still rising against falling to steady global interest rates
- Strong emerging market sentiment (with the ZAR always used as a liquid currency to trade an emerging market play)

I see the ZAR strength as a result of it’s ‘relative position’ (high yielder, emerging market currency, weak USD) to the global market as opposed to being a result of its own internal strength and appeal.

So anyway, USDZAR bulls hoping for a weaker ZAR should have their eyes firmly on the 6.45 to 6.64 band this week. A break of either of the levels will be strongly indicative of the near term direction over the next few weeks.

Good luck for the week ahead.

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