Hi there,

South Africa

There is currently divergence between the technical and fundamental pictures on the ZAR with the short-term picture being dominated by the current technical setup.

The major trend however is being dominated by fundamental issues. As mentioned in last week’s report, the weaker ZAR is fuelling huge ‘real’ inflation leading to a steep rising interest rate curve thus lowering future growth forecasts for the SA economy. My personal feeling is that SA is teetering on the edge of a major credit crisis to come as the local market is squeezed by an ever increasing cost of living and more stringent credit policies that have probably come a bit too late for the market and will probably result in the opposite to intended effect.

The problem with African countries is ‘denialism’. Apparently there’s no crisis in Zimbabwe, Trevor Manuel still thinks we’ll hit our growth forecasts even though we clearly won’t, the record deficit of 8 or 9% of GDP really isn’t a problem as it’s being comfortably funded (which could and probably will change pretty smartly), the inflation target band is being kept at 4-6% even though ‘real’ inflation is currently running at over 20% .etc.

Denialism is rife in Africa and that’s why we’re always playing catch up. We so far behind the interest rate curve it’s not even funny! Denialism inhibits the psyche from seeing beyond today and planning for the future. Like I say, the powers that be were so busy high-fiving each other for a job well done when the ZAR was at 5.60, interest rates at record lows, growth great and inflation in check, that they took their eye off the ball.

Only 2 years later, and we’re at record real inflation levels, high interest rates, record deficits, and a GBPZAR level not seen since 2001.

How do we go from one extreme to the other? Denialism my friends. The inability to see things for what they really are.

So my point is that fundamentally and economically speaking, in my opinion, the ZAR is a one-way bet within the major trend and longer term timeframe.

Short term though we are facing a tricky little situation where the market seems to be rolling over from a massively overbought situation with divergence spotted on the oscillators a couple of weeks ago. 7.70 is the key support level on USDZAR for the week ahead and a break below could see us push down towards the 7.50 level. The next few days are vital to the long term sustenance of the major trend and we need to see some strong aggressive buyers enter the market around these levels to stop a break of 7.70

8.24 – 2008 high. Key resistance
8.01 – Former high. Price needs to break back above this level to ease downside pressure
7.74 – Current Price
7.70 – Strong support. If broken could see market drop to 7.50 fairly quickly. Watch this level this week!

View for the week: Downside pressure early on but once again dependent on Zimbabwe developments in the short term

Australia and New Zealand

GBPAUD currently trading at 2.13 with the look of a potential double bottom in place at 2.10. What this effectively means is that we could be seeing the formation of a very large bottoming pattern within the major trend and if 2.10 continues to hold then we could see a major move upwards over the next 6 or so months. The key resistance is at 2.2150 which is the neckline of this particular formation and at the moment it’s looking good for a potential move higher with both AUD and NZD under a bit of pressure across the board.

I’ve always said that major long-term downtrends don’t just change on a dime and they need to form a big, recognizable bottoming pattern over a period of time in order to really turn the tide. It looks like this is happening at the moment and this is visually very apparent particularly in GBPAUD at the moment.

GBPNZD is a little less obvious trading at 2.5250 at the moment but AUD will always be the dominant currency in the region and it currently has the dominant pattern for sure.

Our short and long-term views are in line with one another and point to a stronger GBP going forward and opinion is to play the long side of GBPAUD and GBPNZD as long as GBPAUD holds above 2.10.

Good luck and all the best for the week ahead!

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