WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 18 March 2007
USDZAR opened the week at 7.33 and closed the week up 13 cents at 7.46
The significance of this is quite large seeing as though the USD has taken a beating like no other this week. Two dominant themes in the US markets serving to pressure the downside in the USD: The first is the threat of 2 million sub-prime mortgages not being able to be paid back, and the second is continuous pressure on global stock markets, which in turn is putting the heat on US stock markets, resulting in a very heavy tone to the USD.
So things aren’t looking good for the USD at all at the moment with a few of the major currencies breaking through significant resistance against the USD.
So how does this affect the ZAR? Well, seeing as though the USD is significantly down across the board , but has strengthened by 13 cents over the week against the ZAR, it would be fair to say that things maybe aren’t looking that great in South Africa either.
You could even go as far as saying that, in the currency markets view, things are looking decidedly worse in South Africa than in the US. And that says a lot because things are pretty bleak in the US at the moment!
The theory goes that if the ZAR is unable to strengthen against the USD in a week in which the USD has weakened against most currencies – then there is an underlying reason why this is happening – and it’s probably a good sign to sell ZAR.
So from this week’s price action you would need to lean towards a weakening ZAR over the next few weeks.
There are one or two issues pushing the ZAR weaker:
- Gold has weakened from around $690 an ounce down to a low around $632. South Africa is a large commodity producer so this drop invariably puts pressure on our market and thus the ZAR
- Emerging market jitters: Traders worldwide looking for an emerging market hedge via the currency markets have two primary options – the ZAR and the Singapore Dollar. So when there is pressure on emerging markets there is pressure on these currencies as they provide the liquidity for traders to move in and out quite quickly and easily. Hedging via the Kenyan Shilling is a no-go so unfortunately the ZAR does take a little bit of the sting from emerging market worries
- The ‘Carry Trade’ unwind: A carry trade is a trade whereby investors and traders borrow money in low yield currencies and invest in high yielding currencies. Ignoring risk premium for now, this would mean that traders would borrow JPY at maybe 0.5% and invest it in ZAR at say 8%. Easy money – until the great unwind comes which has been happening for the past 2 weeks. Traders are effectively closing these trades which is putting pressure on high-yielding currencies like the ZAR
So basically, the weak fundamental picture in SA combined with a lower gold price, emerging market concerns, and unwinding of carry trades is serving to put downward pressure on the ZAR.
Technical Commentary
Technically the ZAR is looking weak having rejected the downside triangle breakout a few weeks ago and having broken above the key 7.40 resistance level last week.
Price action at this stage is pointing to a weaker ZAR with USDZAR 7.55 the next key resistance level.
The market seems to be consolidating its upward move at the moment and just gathering strength for a further push higher.
In my opinion we are on our way back up to USDZAR 8.00 and GBPZAR 15.00
BUT
……please don’t expect miracles as the markets are extremely choppy and volatile at the moment.
Support at the moment currently resides at 7.29 and this level is key to the future direction of the ZAR. This level must hold if we are to push higher and as long as we are above 7.29 then I’m bearish on the ZAR across all timeframes (short, medium and long-term).
Looking for a break above 7.55 this week which should push us higher towards the USDZAR 8.00 level.
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