Hi there,

South Africa

Global financial markets are having a bit of a volatile ride at the moment with equity markets taking a beating, commodities such as oil and gold continuing to push higher, and forex generally directionless within the major trend and extremely choppy within the short term trend. It's very tough to call the market in the short term with any accuracy at the moment. This volatility is being fuelled by the uncertainty surrounding the global credit crisis which is now seeming to feed into countries outside of the US and UK. It's my personal feeling that SA may be next in line and we have a lethal concoction of high interest rates, rising inflation and a falling property market brewing which could see something of similar scale happen in South Africa.
 
Let's wait and see what happens but to me the writing is on the wall, the daggers are already in the backs and Tito is just about to deal the killer blows by throwing a few more in there just to make sure there is no chance of recovery.
 
The SA economy is coming to a grinding halt at the moment. Recently released annualised GDP figures were a joke, coming out well below expectations. This slowdown can be attributed to the electricity problems of the past 6 months or so and also the steeply rising interest rate curve which is stunting growth in the economy. The problem here (once again) is that inflation is being fuelled by external factors such as the high oil price and a strictly monetary policy using interest rates as an inflation targeting mechanism is like prescribing cough medicine to a dog with a broken leg. There are ways and means to fix a problem but it's not always necessary to rush into hospital. Sometimes you simply need a visit to the local GP. It seems though that our government only knows one road and that's the M1 straight to Milpark.
 
Anyway, there seems to be a reverse correlation in the market at the moment between the ZAR and the EUR. Traditionally these currencies (in theory) have always moved in the same direction but we're seeing the ZAR strengthen substantially of late whenever the EUR takes a bit of strain. My suspicion is that there may an interest play going on here or something of the sorts but the ZAR is very attractive at the moment for the high yield it offers to investors. Bear in mind though that these are short term flows which leave as quickly as they arrived which often explains the intraweek volatility and wild swings characteristic of the ZAR.
 
So we've seen some good strength in the ZAR this week with USDZAR, GBPZAR and EURZAR closing stronger at 7.75, 15.37 and 12.17 respectively in the interbank market. We've seen some dovish commenst coming out of the Eurozone this week which led to a drop in the EUR which may see a turn in the forward curve in their rates markets and it was maybe on the back of this that saw investors buying ZAR and selling EUR, GBP and USD against it. It seems a pure carry or yield play to me as no-one in their right minds should be able to see fundamental value in the ZAR at the moment.
 
So from current levels I'm always looking to sell ZAR on the back of the major trend which is definitely a weaker ZAR. It's not always an easy one to sit back and relax on as the market can swing within an intraweek range of R1 on GBPZAR quite easily. We do need to see USDZAR hold above 7.70 with the next key level at 7.43 to see the uptrend resume although we do seem to be struggling to break higher again probably on the back of global uncertainty but a relatively strong JSE (equity markets) supporting the ZAR.

Good luck and all the best for the week ahead!

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