WEEKLY ZAR ECONOMIC AND TECHNICAL COMMENTARY

This past week saw the release of various indicators being described by local economists as ‘surprising’ and ‘shocking’. The only surprising thing about this week’s inflationary indicators is that it has shocked these economists and traders alike. Their reaction has been to factor in two more interest rate hikes by the end of the year – strangely enough these are the same highly paid economists some of whom earlier in the year weren’t expecting any interest rate increases by year end. How I would love to be an economist – the ability to be well paid, make inaccurate forecasts and still get to keep your job.

I mean, c’mon, surely no-one in the country actually believes that inflation is around 4% p.a. Do a little test that I like to call your PIF (Personal Inflation Rate). It’s very simple, work out your total spending for the month and weight each individual component of that accordingly as a percentage of your total spending. Now look at how much each component cost a year ago, 2 years ago, 3 years ago, and so on and you’ll quickly realise that your personal annual inflation rate is closer to 20-25%! It’ll make you cringe the next time your boss gives you your CPI based salary increase of 5% telling you that you’re actually getting an extra 1% above inflation – just because the company ‘really like you and don’t want to lose your services’. Hah hah.

Time to stop being so judgemental but truth be told the inflationary pressures and interest rate increases should’ve been seen coming from a mile away! And now the market is panicking.

If there’s one rule of thumb in the financial markets its do exactly the opposite of what the economists are calling and you’ll make money.

So now that the interest rate cycle in SA has most definitely turned the next step is for economists to associate a rising interest rate market with a strengthening currency. My advice is to throw your Economics 101 textbook in the bin and look at the current price action in the ZAR and what the market has been trying to tell us over the past few months. The ZAR is weakening and going to weaken even further! I think it rather strange that the ZAR was the top performing currency in the world over the past few years on the back of falling interest rates. I find it very hard to believe that the ZAR will now also strengthen on the back of rising interest rates.

An inflationary environment in an emerging market economy coupled with the potential for large, fast upward movements in interest rates could potentially be a recipe for some fireworks in South Africa.

Bear in mind that our trade deficit has now come in at 6.1% of GDP. At this point in time it is comfortably being financed but then again so has the US been able to finance their deficit and we all know what has happened to the USD over the past few years. Their deficit is only around 5% of GDP and the rot in the USD started when theirs was only 4%.

The bottom line is that there are problems in the SA economy and the ZAR will bear the brunt of these problems not being managed effectively.

That’s not to say that the ZAR is going straight to GBPZAR 15.00 as it’s important to understand that markets don’t move in straight lines. They move in beautifully formed zigzags, pulling back and pushing forward to important price levels subtly testing the market that to the trained eye can give you a very good indication of where the ZAR is going.

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Be patient, don’t get carried away or overly influenced by the intraday moves and keep an eye on the big levels indicated below.

USD/ZAR

OK, so here’s the daddy of the ZAR crosses. This is the boy that ultimately determines where the ZAR is going – up or down.

Technically speaking, the ZAR has formed a large saucer type bottom over the past few years and has now broken out of that range bottom formation. We have seen a strong bounce off the Fibonacci 61.8% retracement level of the 5.90 – 7.54 move at 6.75ish which bears positively for a move up towards new highs over the next few months. As you can also see in the chart below, price has broken strongly through the descending trend line indicating that the trend has indeed changed. Our next key levels on the topside are 6.30 and 6.54. A break above the latter level will indicate that the party is well and truly over for the Rand. Our key levels to keep an eye on the downside are then 6.70-75 and below that around 6.40. Breaks of these levels will give a strong indication of where the ZAR is going but we will need to break above 7.30 to get the momentum going again on this pair. Watch these levels!

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GBP/ZAR

As mentioned in my USDZAR commentary, the ZAR crosses are determined by movements in the USDZAR.
On Friday last week GBPZAR made a key upside move through the previous high at 13.64 making a new trend high at 13.75. This is a key move and indication that GBPZAR is heading higher. This is notoriously a very volatile currency pair and traders should expect large swings.

It is important to bear in mind that any strong trend needs healthy corrections before it can move up again. People often expect the ZAR to fly straight up to 15.00 and then onto 20.00! The markets just don’t work like that. I prefer to see a trend being built over a period of time as opposed to moving 3 big figures in a week. Particularly on GBPZAR, it is important for price to pull back, reload its springs and then break to new highs. This is the type of price action we are currently seeing after a very long basing period and it’s looking like we could see GBPZAR 15.00 in the next 3-6 months.

Have a good week!
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