There are some weeks where the market tends to give me a timely reminder of who the boss is, and last week was unfortunately one of those! Everyone, including myself, expected that Jacob Zuma’s win in the ANC presidential elections in early December 2007 to be met with a weaker ZAR tone but strangely enough exactly the opposite has happened.

I’m still of the view that fundamentally the SA economy is in pretty bad shape overall – unstable political climate, rising interest rates (although this is playing into the hands of a strengthening ZAR), high unemployment, record trade deficit, slowing growth.

To me the ZAR, fundamentally, is a sell. So why then is it strengthening?

The major reason why the ZAR is so strong at the moment is that the SA market (and most emerging market economies) are still in a rising interest rate cycle whilst the rest of the developed world is in a falling cycle. The interest rate differential is currently in favor of investing within the emerging market sector and there are only a handful of liquid markets to play within these markets – one of which is South Africa. So basically, investors and traders are presently chasing ‘yield’ and that yield is to be found in SA’s high, and rising, interest rates.

The last week was particularly horrible for ZAR bear hopefuls (such as myself) with the latest UK and US economic releases pointing to further rate cuts within these markets, as well as a potential recession in the US. There is a debate going on at the moment whether the US is in recession with the market currently undecided on this issue but with the expectation of further aggressive rate cuts within these markets being priced in.

So as rates fall in the UK and US, and rates rise in SA, there is only one thing to do I’m afraid – buy ZAR to benefit from the widening positive differential in favor of the local currency.

Just a little note to also mention that gold is now trading at record highs above $900 which serves to further underpin and strengthen the ZAR.

So from the above the ZAR is clearly a buy but my worry is that we’ve missed the boat on this one. Don’t be the last to jump on the bandwagon as that’s when the wheels start falling off!

I prefer to just put my hands up on this one and say that I didn’t see it coming and the move was missed. Put it in the past and look forward for the next move. To go start buying ZAR aggressively at these levels wouldn’t be the best move unless we see further downside breaks below key support levels.

So where to from now?

In the same way that the market can’t just continue indefinitely to the topside, I would also expect something similar on the downside. We’ve moved from highs of 14.65 to lows around 13.15 on GBPZAR within the past month which is a fairly large move so it’s safe to say that the market is pretty oversold at current levels (USDZAR and EURZAR haven’t moved too much during this same period). This doesn’t mean to say that I would be selling ZAR either – I would be looking for opportunities to start selling ZAR from these levels.

There are two key support levels at the moment: USDZAR 6.64, GBPZAR 13.25 which are major lows within the medium term trend and we would need price to bounce upwards from these levels to start giving indications that we could bottom here.

A significant break below both these levels could point to further downside and in particular, a break below 6.64 in USDZAR confirms a double top at 7.08 with a pretty horrible looking objective around 6.30.

Please keep a close watch on these 2 support levels this week which will need to hold or we could see further fast downside moves should these levels break.

Good luck and all the best for the week ahead.

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