WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY – 27 March 2007
I seem to have slowly lost my sense of humour over the past few weeks.
The markets really are extremely tough at the moment with intraday volatility a little all over the show, historical currency correlations are out the window and just generally the markets are a little crazy – they say the financial markets are a reflection of human behaviour so maybe we’re all a bit nuts! I thought I was fairly logical but the past few weeks have frustrated me beyond belief.
Just when I thought I had this market all figured out he gives us a gentle reminder of who’s the boss. It’s a little like a Saturday night out on the town trying for the umpteenth time to teach my body a lesson – every morning I wake up to the gentle reminder of who the real boss is!
Anyway, enough of that. Here’s where we stand sports fans:
The market has been truly choppy this week. The bigger picture points towards a much weaker USD but it’s taken a few big intraday swings to get there.
The bottom line is this:
EURUSD trading at it’s highest level since mid-2005
AUDUSD trading at it’s highest level since 1997
Basically the USD is pretty weak across the board and under some serious pressure particularly against high-yielding commodity currencies like the AUD and ZAR.
Last week I told you that gold dropped from around $690 to $632 or so. This week we’re back at $665 so this obviously supports our good friend the ZAR.
On the economic front, a couple of interesting releases this week pointing to another potential interest rate hike in South Africa. Traders have bought ZAR fairly aggressively on the back of this expectation as they seek to receive higher returns from higher yielding currencies. That’s the theory anyway. Sounds pretty cool, but my theory is that some guys saw a nice little opportunity to buy ZAR – and they did. And why did they? Cos they wanted to make some money!
The interesting fundamental issue for me that seems to have been completely ignored by the markets is that South Africa’s current account deficit has increased from R99Bln to 143Bln. It’s now sitting at a staggering 7.8% of GDP. That’s ridiculous.
Of course, the SA spindoctors have tried to put some spin on the number saying it would only be 6% odd of GDP if it wasn’t for some mining stuff (I can’t even care to remember what it was). That’s like saying ‘my house wouldn’t have burnt down if it wasn’t for that petrol bomb I threw through the window’. C’mon……..you either live in reality or convince your subconscious mind of something else. It’s like saying ‘Darn I’d be a pro golfer if it wasn’t for my sore back!’. Bottom line is – you have a sore back and maybe you should think about taking the SA economy to the chiro with you. Maybe get a 2 for 1 deal!
Look, I’m not saying SA’s economy isn’t doing well but I stick by my opinion that there are structural problems that are slowly poisoning the economy – and these problems are slowly starting to show up in a few of the numbers. The problem here is that the government are prescribing horse steroids for a common cold.
Interest rates are expected to be increased to put a lid on consumer credit – I say…….maybe the reason why people need credit is not because they all want to drive fancy cars, but maybe because SA is getting very, very expensive. How can people be expected to survive without credit when your annual salary increase in 5% but everything else has increased 10-20% p.a.
So anyway – that’s why we love South Africa – it keeps us on our toes and the complexities make it nice and interesting. It’s like trying to piece together a puzzle – a bloody hard one!
Technical Commentary
Technically, ZAR is still at a major crossroads and realistically has done a whole bunch of nothing since the beginning of the year. Sure, we’ve had a few nice up and a few not so nice downs – but overall we’re as good as flat for the year.
So there’s indecision in the market at the moment and has been for a while now. This scares me a little as when the market does eventually decide to go – it’s gonna go.
In my opinion this direction is still going to be up (weaker ZAR) but realistically we’ve all got a 50% chance of guessing right anyway.
What I will try and do is highlight levels that may be useful over the next week and if you see these break then it gives clues as to where we may go.
Right now, the key support level is around 7.15 where there is a rising trendline from the end of last year. The market is watching this carefully and if we manage to hold above this level then it will reconfirm the up trend. Looks, it’s potentially a very wide rising channel that’s being formed but nevertheless as long as price stays above 7.15 then we are headed higher. Keep a close eye on this level.
If we break below it then we are back to neutral levels and will have to reassess next wee. Strong support all the way down to 7.00 so I don’t expect us to fall much further in the short-term.
We could around current levels for another week but we need to break above USDZAR 7.55 to see any new moves to the upside. Price has been rejected twice from this level and I’m a little concerned we may have technically formed a short-term top that may hold USDZAR in these lower ranges for the next week or so.
Important levels to watch for the week are as follows:
Resistance 3 – 7.55
Resistance 2 – 7.28
Resistance 1 – 7.23
Current Price – 7.22
Support 1 – 7.15
Support 2 – 7.03
Support 3 – 7.00
