Hi There,

South Africa

Last week we called the potential for a sharp downward reversal in USDZAR and crosses within the short term timeframe and this is exactly what happened. On Friday afternoon an emergency MPC meeting was called to discuss inflationary issues within the local economy and this was interpreted by the market as pointing towards an inter meeting rate hike of between 0.5% and 1%. It’s becoming a crazy situation at the moment. The only tool available to the MPC is interest rates and their only target is to keep inflation within the 4-6% band. I personally always felt that economic growth, a stable ZAR and a healthy trade balance were completely overrated! So basically the MPC have one target by which they are judged and they have one tool to hit that target.

The problem with only using one tool (interest rates) to target inflation is that you are then basing your assumption that higher inflation is being triggered by people’s inability to curb their compulsion to spend. The problem here is that South Africa’s current inflationary pressures are most certainly NOT being exacerbated by wild spending and it seems that the consumer is being severely punished for an imported inflation exacerbated by the short sightedness of the MPC and government 2 years ago. The average person is simply struggling to survive in SA at the moment and it is once again short sightedness by the government that is going to further exacerbate the problems in SA and probably cause a housing and credit crisis similar to that of the US and now the UK. Curbing inflation through the use of interest rates in a struggling economy is like prescribing cough medicine to dying horse. A bit silly and I have a feeling that I’ll be the one saying ‘I told you so’ in 6-12 months time.

There was a pretty interesting article this past week about ‘real’ inflation in SA. Have a read if you will http://www.news24.com/News24/MyNews24/Your_story/0,,2-2127-2128_2311485,00.html

What it basically says is that ‘real’ inflation is closer to 30% and the problem is that your annual salary increase on 5% is a joke. Corporate SA has to take on some of this responsibility as well or we’re about to hit some seriously stormy weather. I stick by my guns to say that there is a major, major credit crisis booming in SA at the moment and okes better watch out.

The current move down is a ‘sucker move’ within the major trend and is a short to medium term correction within the ZAR bear trend. The downside pressure is most certainly on at the moment but we need to see way more downside before this starts to threaten the underlying direction of the major trend.

View for the week: Downside pressure early on for most of this weekend supported by a growing positive interest rate differential in favour of the ZAR.

Australia and New Zealand

Not a great deal to chat about this week regarding Australia and New Zealand.

GBPAUD currently trading at 2.11 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 versus AUD and NZD, and opinion is to play the long side of GBPAUD and GBPNZD from these levels as long as GBPAUD holds above 2.10.

Good luck and all the best for the week ahead!

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