Welcome to the Exchange4free weekly market report.

South Africa

The Rand has surprised most in the market by it’s continued strength of late and this continuous push stronger is starting to have an effect on the longer term technical picture.

There are a few primary issues contributing to the Rand strength at the moment:

- High positive interest rate differential in favour of the ZAR. Basically, interest rates in SA are high and rising, whereas in most of the rest of the world rates are low and falling even more. This makes it attractive to hold Rands as you receive a higher interest rate on your currency holding.
- There is talk of a Middle Eastern buyer of MTN. We’re seeing similar Rand buying now to what we saw when there was early talk of Barclays buying ABSA. Naturally, when the market sees a big deal like this coming along then it makes sense to position yourself with this future Rand demand.
- Zimbabwe so far, from an international perspective, seems to be making peaceful headway. The Reserve Bank have also decided to let the currency float in the past week or so.

The problem here though is that we’ve missed the boat a little bit on this move and I would be tentative to call too much further Rand strength. Bear in mind that GBPZAR has now dropped from 16.60 down to 14.50 in the interbank market on Friday. It’s a pretty beefy move and to chase the downmove from these levels may be a little too late. For quite some time I’ve preferred to play the short side of the Rand so would be looking to current levels to sell ZAR.

There is no major economic data out this week but I still stick with my long term view that there is a major major credit crisis on the horizon in SA. Most people who I’ve mentioned this to have dismissed this idea which makes me even more convinced that it’s going to hit the fan in a big way very soon! It’s so blatantly obvious it’s not even funny. I even think that the crisis in SA could be far far worse than the US and UK purely because our guys are and have been in denial about the state of affairs in SA that it has exacerbated the problems brewing in the SA economy. If you can’t even accept or see the problems then how could you possibly deal with them properly. This is the major problem facing SA at the moment. Once again we have our heads in the sand and can’t see the storm brewing on the horizon. To say that interest rates 10 years ago were at 25% is just silly. SA is becoming an increasingly credit driven economy, not because of our insatiable appetite for luxury goods, but purely because people generally have no choice. Like I’ve said before, the big high five that your boss gives you when he gives you your annual 5% salary increase just doesn’t cut it in an environment where ‘real’ inflation is closer to 30%. There is only one outcome to this little problem – it’s called a credit crunch. The US and UK have been hit by it, there’s no reason why SA is immune from this type of scenario and it seems pretty clear to me that it could be worse.

This can obviously only be negative for the Rand over the longer term and I see it weakening from here within the major trend.

In the short term we are going to need to try see the Rand stabilise over the next week before we start calling any strong upmoves from here. Markets don’t turn on a dime and the current short term trend is definitely down. It would be a good start for Rand bears just for the market to stabilise around these levels and then see where we go from there.

View for the week is FLAT to rangebound.

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