Last week was a crazy, crazy week. There is no other way to put it. In summary:

- The US surprised the market by cutting interest rates by 0.75% between scheduled Reserve Bank meetings further widening the interest rate differential between itself and high yielding currencies such as the ZAR (this particular move saw USDZAR drop very quickly from 7.34 to 6.96 before finding support)
- This cut led the European Central Bank chief to issue a slightly dovish statement pointing to potential similar cuts in Europe
- A derivatives trader for a French bank lost around £3.4 Billion
- Gold traded to record highs on the back of South Africa’s current power crisis with many mines having to close up shop for the time being
- Zuma has not re-elected Trevor Manuel nor the current Deputy President to the ANC’s parliamentary committee

……..so it’s pretty doom and gloom out there and it was an extremely volatile week for the markets (equity, commodities, currencies – everything)

It really is pretty scary out there at the moment but for our good friend the ZAR it seems like one way traffic. Fundamentally I can’t think of a time when the ZAR has been worse. Seriously, this is not even an area where I’m going to bother explaining myself. There is surely not one trader or investor in the entire world who is bullish ZAR from a fundamental perspective. And when I say the entire world, I actually mean the entire world. It’s looking pretty ugly from where I’m sitting.

Technically, we’ve also had a very interesting week. I’ve attached a chart (which hopefully comes out in this commentary) that clearly underlines the importance of the 200 day moving average. We can talk fundamentals, economics and all that jazz all day long but what has happened in the past few months is a little beyond random chance.

In previous commentaries I mentioned that the market needed to break above the 200 day MA in order to see a change in the major trend. This line was tested at the end of Nov at 7.08 (with the market subsequently being sold down to 6.64) and mid December at 7.01 (with the market subsequently being sold down to 6.70). Both cases saw a very aggressive reaction to these tests reinforcing the validity of this 200 day MA.

On the third test about 2 weeks ago we finally saw an upside break above this line which drove prices quickly higher to 7.34. This is an indicative of a market breaking a major, major level as once the break occurs it causes prices to aggressively shoot up. This is very relevant when you are talking about the 200 day MA as it generally represents the point at which a market is considered to be either in a bull or bear trend (below the 200 day MA is bearish, and above is bullish).

So the break above this line represents a complete shift in the mentality of the market from bear to bull, and in this case from a strengthening ZAR to a weakening one.

USDZAR has subsequently retraced back from the 7.34 highs to exactly 6.96 (on the back of the surprise cut in interest rates by the US Fed) which surprise, surprise exactly where the 200 day MA is currently sitting. The market found strong support at exactly this level and has since been aggressively driven back up to 7.20. The chart below probably illustrated the point even better and serves to illustrate the importance of this 200 day MA. This is our key support level going forward and if you’re not one for watching the intraday or even intraweek moves on ZAR – just keep an eye on this line going forward. As long as price stays above this line then the ZAR is headed weaker, if it drops below then beware! This 200 day MA is the benchmark within the major trend (next 6-12 months) so keep a close eye on it (light blue line below).

Good luck and all the best for the week ahead!

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