Downgraded Rand carries on, but for how long?

ZAR

Another intriguing week has come and gone – as the Rand enjoyed more of the same testing down toward R15/$.

Once again, it was counter to logic. We had clients contacting us, worried by the next downgrade from Moody’s & Fitch as to how it would affect the Rand’s value.

And rightly so, this was a big change. But once again – we saw the market’s irrational reaction, as the Rand edged stronger. Demonstrating once again that events do not give direction to the markets – human sentiment does. But let’s get into the full review and explain that a little more.

Key Moments (23-27 November 2020)

Here were the biggest headlines from the 5 days:

Ratings Downgrade – against expectations, we saw SA pushed deeper into #JunkStatus where to from here?

Stock Market Boom – as the DOW broke 30,000 points, true euphoria was starting to break out in the speculative market of 2020 where does this end?

Rand tests R15/$ – against expectations after downgrade news, the Rand enjoyed another strong week

BTC Rollercoaster – the crypto was making headlines for booms and busts as this week saw the volatility of 2017 return!

So to start the week, the first news hitting everyone’s desk was Moody’s and Fitch’s downgrade of SA’s investment grade rating.

It was a body blow for an already undermined economy from the pandemic – and just when the country was expecting some leniency in these crazy times, the ratings agencies dropped the hammer.

Different associations expressed their disappointment with the rating change which saw SA drop further than their previous BA 1 rating.

The ratings agencies have highlighted high government debt, weak growth and exceptional high levels of inequality as the main reasons for the downgrade. There is, however, light at the end of the tunnel for investors as S&P have kept SA’s credit rating unchanged with a stable outlook.

What the country now faces is a further stretching of its already strained resources… and even less wiggle room for persons like Mboweni to turn things around.

Nothing but negative for the Rand, that was for sure.

Well, it was not as simple as that.

When markets opened early on Monday morning (just after midnight), the USDZAR was at R15.41.

By 11am, we had hit R15.25!

How? Why? Nobody really can give a rational answer because such is the nature of irrational markets.

Markets are moved by sentiment – and these kinds of events only provide a trigger.

Which is why you see so many economists looking at market movement AFTER it has happened and then try to rationalise WHY this happened – by using some event or bit of news.

Anyone can do this – and it doesn’t help us AT ALL to expect future movements.

But, if we can track the human sentiment through techniques like our Elliott Wave based forecasting system, then you can get an idea of where a market is expected to go in time and price.

So what followed after that was the USDZAR tracking back up to R15.45, before then resuming the downtrend:

USD/ZAR

It had been a crazy week, that was for sure – as economists were turned on their heads once again with the Rand flirting with R15/$!

And then in other news:

As you know, we like to give you a view wider than the Rand in this newsletter – and in other markets, we saw some astounding moves, particularly in Crypto. Bitcoin saw an astounding move, pushing to a 3 year high of 19,500. But in true-to-Bitcoin fashion, we were trading down at 16,200 in just a few days time! But this move did not come by surprise, as we actually issued an update to our clients on November 18th, expecting the market to top between 17425 and 19666, and then head weaker. You can get access to our BTCUSD forecasts over here – and below is a sneak peak into part of that forecast we issued to our clients earlier this month:

BTC/USD

Then over in the US, the stock market boomed to all time highs on the back of the positive vaccine news. The DOW broke to an incredible 30,000 points – a record level never seen before. The NASDAQ and SP500 have also continued to climb, as market speculate, however, this IS reaching euphoria which means the market going to come crashing down in a heap – make no mistake about it. When others are greedy, be fearful and never forget it!

Proof of the speculation comes in stats like the US Jobless claims, with the number filing for unemployment benefits rising to 778,000 well above market expectations of 730k. This is a warning sign that the pandemic’s effects are FAR from over. The real test for the economy is yet to come.

But persons generally seem to be moving towards riskier assets, as Gold has come tumbling down from it’s perch near 1960 just a few weeks ago to now trade at under 1800. The Dollar Index has also taken a massive correction to break below 92 point. And this is while oil rises to its highest price since March. Interesting times!

As for the Rand, we saw rather a stagnation towards the end of the week, ending in the South African close being around R15.25. When will the breakout come?

Well, as we have seen with other markets this week, when it does come, it comes fast.

Expect nothing less from the Rand, and be prepared. The tide of strength is due a change.

The Week Ahead (30 Nov – 4 Dec 2020)

As we head into the new week, there are some potential economic releases which could provide triggers, with the below being some of the main ones

  • SA – Balance of Trade
  • USA – Fed speech, Jobless Claims, Non Farm Payrolls, Trade Balance
  • EU – Consumer Price Index & ECB President Speech
  • But all eyes will likely remain on potential lockdowns globally.
  • And then, of course, the US election results.

While Trump agreed to some initial preliminary access to federal resources to Biden, he continues to push forward with court action on the alleged voter fraud.

Legislators in some of these states appear to be taking these claims seriously, with Pennsylvania, Michigan and Arizona all agreeing to hearings.

Based on the Pennsylvania Senate hearing held this past week (as well as new federal lawsuits), there certainly appears to be evidence of significant anomalies, irregularities and deficiencies that occurred, including huge ‘vote dumps’ for Biden in key swing states in the early hours of the morning after the election – seemingly coming out of nowhere.

Expect to hear of more details in Michigan and Arizona hearings this week.

As we have mentioned before, we quite expect this to go all the way to the US Supreme Court before a victor is announced.

As for the Rand, expect plenty volatility once again. We will keep looking at our Elliott Wave based forecasting system to give us some clues, with two key levels that we will be watching to confirm our larger degree trends.

Another interesting week lies ahead!

Please take our Rand forecasting service for a test-drive! This will give you access to the same charts we are to give us and our clients the likely direction of the Rand – ahead of time, enabling you to make educated and informed decision. Simply use the link below to get access now. No charge. No card. All yours to trial for 14 days. Click here to access to our forecast from Friday on the house!
If you have any questions or feedback, please let me know. To your success~ James Paynter
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