Hi there,
South Africa
The Monetary Policy Committee held interest rates steady last week at 12% bringing a halt to the pattern of sharply rising interest rates and dampening the high interest rate differential enjoyed by the South African Rand. The market has taken this as a positive move for the Rand with the economy under pressure from a growth, employment and credit perspective. Another interest rate hike may have put the final nail in the coffin for many SA consumers. There has been an air of panic in the SA market with consumers struggling to keep up with their debt repayments, and possibly even a hint from the Reserve Bank that they had moved a bit too swiftly in raising interest rates to such high levels without allowing enough reasonable time for these hikes to filter into the economy and take effect.
There is currently a very serious threat of stagflation in the SA economy. This is a situation where inflation is rising (generally associated with a growing economy), and market growth is actually declining. The problem here for SA is as follows: The MPC have only interest rates as their one and only tool to control the economy. In order to control inflation they need to raise interest rates, but in order to kick start a slowing economy they need to decrease interest rates. So they’re in a bit of a tight spot to say the least. Retail sales and the general economy is without question slowing whereas inflation is still rising (and in my opinion is grossly underestimated).
So the MPC have an interesting scenario playing out at the moment and it seems that from last week’s interest rate decision they have gone with trying to kick start the economy. The risks to raising interest rates further are very high: more unemployment, credit crisis, falling housing market, consumer distress, political pressure .etc. whereas the risk in keeping rates flat are not so high as it is only inflation that is under pressure from doing so. I would think that they have looked at the massive drops in oil and gold (and other commodities) and taken this as a sign that once these moves filter into the economy then inflationary pressures should ease.
So where are we on the Rand? We’ve seen some pretty frightening moves on the ZAR of late dropping down from 8.20 to 7.18, and straight back up to 8.00 again. I spoke of a very large double top that had formed across USDZAR, GBPZAR and EURZAR and in particular that 7.43 was key as that was the neckline of the pattern and a key level. When the market bounced it held around this level for over a day and then when it broke higher it shot up 20 cents or so very quickly. This is indicative of the rejection of a very important level and when it gets broken then it’s a good sign that the market is going higher in the short term.
Within the major trend we have actually been range trading between 7.20 and 8.20 since January and the market will be setting up a big move within the next couple of months. This move may be determined by fundamental rather than technical factors as there are some major events coming up in SA over the next while.
My view for the week is that the market is maybe slightly overbought in the short term and we should see some consolidation over the next few days while the market catches its breath from the last big moves. We would see the market tick back down slightly as the market eases out of its massively overbought position.
Good luck and all the best for the week ahead!
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