South Africa
Financial market conditions in SA are simply not looking very positive at the moment. From a fundamental perspective we have seen significantly lower than expected GDP figures being released coupled with high and rising interest rates which will stunt this growth even further. The talk in the market at the moment is that we’re going to see a 2% rise in interest rates at the June MPC meeting. At first glance this is positive for the ZAR as it further strengthens the positive interest differential that SA enjoys over other markets, but on closer inspection it’s just another nail in the ZAR’s coffin. The days of high interest rates attracting capital are well over and those who think that high interest rates strengthen a particular currency are simply naïve. On the back of this story about interest rates rising 2% we saw GBPZAR drop about 30 cents (ZAR strength). This is the naïve camp trying their play. This simply represents an opportunity for those who know better to sell ZAR at more favourable levels.
My biggest concern at the moment is that the MPC are missing the point a little bit. Much of South Africa’s current inflationary pressures can be attributed to external factors, imported inflation and the effects of a weaker ZAR. It’s not being driven by our insatiable appetite for big houses and fast cars. Rising interest rates to curb inflation in SA is like using horse steroids to cure a common cold. It’s the solution I would expect from a 2nd year economics student. Real life is a little different and gone are the days where a standard cure is applied to all forms of inflationary pressures. Each situation needs to be judged independently and my worst fears are that the current inflationary pressures are just being exacerbated by the current tools being used by the SARB. They are directly weakening the ZAR, slowing growth and setting the country up for a massive potential credit crisis. I genuinely believe that the UK and US will look like nothing compared to what can and will happen in SA. The government has no hope of controlling or aiding a situation like that so I see major trouble on the horizon.
Anyway, so from a fundamental perspective it seems to be a clear ZAR sell within the major trend.
Short-term it’s very tough to call the ZAR so it’s better to focus on the medium to long term trends as opposed to being caught up in the intraweek swings.
7.78 is key on the upside and 7.42 on the downside. I’m looking for a break above 7.78 this week to hopefully see a sustained push higher in USDZAR. The market is a bit in limbo at the moment and has been stuck in a 7.43 to 7.78 range for quite some time. We need a break outside of these barriers to give renewed confidence to the next trending move and the market (fundamentally and technically) seems primed to give the upside targets a try this week. I suspect we could see a pretty quick move up on a break above 7.78 so keep a close eye on this level as these moves should affect GBPZAR and EURZAR quite a bit (although EURUSD and GBPUSD trends seem to be turning here in the short term).
Good luck and all the best for the week ahead!
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