Fed Wreaks Havoc in the Markets – What’s Next For The Rand?

Rand capitulates by over 100c against US dollar - Where to now

Just when we thought the Rand could not get into more of a rollercoaster, that is just what happened as another week continued to shock and throw every expectation!

The Fed broke from a more than 20 year trend, quite fittingly in fact in terms of when it happened, as the Dollar also broke 20 year levels.

It is clear that we are in a state of flux in the markets, and the next couple of months are going to be critical to determine what kind of a year 2022 is going to be for forex, stocks and even crypto, let alone economies globally.

As regards the Rand, it is currently suffering from bad whiplash, as one event after the next throws the market back & forth. Let’s get into the full review to get some idea of what all transpired…

Key Moments (2-6 May 2022)

Before we begin the week, here were the biggest talking points from the 5 days…

  • Fed Hike – a record hike of interest rates sent shockwaves through the market…was the Fed FINALLY admitting the gravity of the situation?
  • Stock Crumble – the stock party is well and truly over as markets capitulated, enduring their worst day since 2020 on Thursday
  • Eskom Woes – load shedding continues, and the worst of winter is yet to come…as Gordhan tries to play bad news down, what can be believed?

Getting back to where the Rand started the week, we saw the local unit open around R15.80, having recovered some ground late in the previous week…

…but now was going to be the test of whether this could be sustained.

And out of the gate, the Rand was on the back foot, losing ground with worries over the US’s plans for interest rates.

Typically an interest rate hike would be Rand-negative, as higher yields in the USA would mean persons would be enticed to go with the safer option of USD investments, rather than risking other currencies. However, if the return was higher from other currencies compared to USD, they may be tempted to branch out.

So with an anticipated rate hike, the Rand’s jitters were not unexpected…according to rational logic.

And into Tuesday we saw the Rand weaken to upwards of R16.10/$ again.

But this was all just part of the journey awaiting the official Fed Interest Rate decision on Wednesday evening…

However, before we even got there, we saw the Rand completely flip the script!

During the course of Tuesday, the ZAR made an incredible comeback, moving to trade in the low R15.70s by the time the decision was made!

And what a decision it was – a 0.50% increase!

This is the biggest increase since 2000, and is in response to the inflation pressures that are just not letting up…

…in addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month.

This was in line with market expectations, but still came as a bombshell of a decision!

And surely a Rand-negative one?

Well…that was where things got interesting. The Rand pushed 30c stronger in less than 2 hours following the decision…

How? Why? What caused it?

Once again, the Rand had caught many by surprise…

…as rational logic was thrown out the window!

Buy the rumour, sell the fact – whatever you want to call it, it is counter to any logic, and proves why financial markets need a proven system to forecast!

The ZAR traded as strong as R15.40 on Wednesday evening, as everyone was again reminded that events are triggers for underlying sentiment, and do not dictate market direction!

And speaking of, on Wednesday evening, in the midst of this chaos, we issued our next update for the USDZAR, with the outlook for the upcoming days… With the Rand at R15.43, our expected trend was for the Rand to bottom out in the target area of R15.46-15.06, before moving higher in the coming days with a sharp move to the target area of R16.16-16.62.

Remember this forecast…we will come back to it a bit later.

Because now it is time to look at some of the other key talking points from the week:

  • Stocks…phew, what a mess! Thursday saw the Dow tumble 1000 points in its worst day since 2020, and Nasdaq also 5% down. Friday continued the volatility as the sell-off continued. There are now some critical levels to watch that if broken, could result in triggering some of the most monumental crashes we have seen. This could be just the tip of the iceberg, and the fear in the markets is very real, with spiralling inflation rates and the Fed’s latest calls on interest rates. We are in for a landmark few months in the days ahead…the warning from economists, was that we are “nowhere near the bottom”…and our analysis is confirming this.
  • Everything we have covered up until now has been with a global view, but locally there was plenty on the go, despite the Rand largely being dictated by global events. Eskom continues to be a major cause of concern, even as Pravin Gordhan tries to play the situation down. With calls coming for a state of disaster because of Eskom, Gordhan said there is no need whatsoever, and that Eskom can still go to “Stage 8 load shedding”…a terrifying prospect when you consider the effects that even Stage 3 or 4 have on the economy.

    He also tried to assure the public that the ANC was hard at work trying to fix the power company, and that the ANC had “honest, patriotic” people who wanted load shedding addressed and the company fixed…perhaps persons would be more willing to believe him if there were any visible changes and improvements, but the general feel is one of doubt!
  • Across the pond, the BoE hiked rates by 0.25% but warned of a risk of recession, triggering a 2% collapse in GBP. The next few months of interest rate decisions are going to be fascinating. Fed Powell has ruled out a 0.75% rate hike in June, but stranger things have happened…

And then we were on to Friday – and despite so much negative news, the US rebounded with US payroll growth showing 428,000 new jobs, identical to March, and above the 400,000 estimate. Employment held firm at 3.6%.

The Rand however, did not…

…as now, instead returning to follow rational logic (good news means stronger, bad news means weaker), the local unit ‘popped’ its lid once again, continuing the volatile trend of the week. Before the day’s trade was complete, we had seen the Rand hit R16.17, validating our forecast from Wednesday exactly!

What a week it had been, with wild swings in value, economic shocks and all the typical drama of financial markets.

This is not a time to be sleeping at the wheel, as things change in the blink of an eye – and our Elliott Wave based forecasting system has proved it’s resilience once again, calling the moves even at the most volatile of times in the markets. And as the Rand closed out around R16 to the Dollar, that was the wrap of the whirlwind week!

The Week Ahead (9-13 May 2022)

So as we move into the week ahead, it feels like a combination of events are turning the markets into a pile of gunpowder, just awaiting the match to set them off.

There is no denying that stocks are precarious, and as the Dollar soars higher, this is leaving many currencies vulnerable too.

What comes next will be nothing short of fascinating…!

In terms of events that could trigger moves, this is what we are looking at:

  • US – Inflation Rate, Jobless Claims
  • EU & UK – Trade Balance, GDP Growth Rate

But once again, do not expect these to give direction for the markets, but merely provide triggers, along with all potential triggers from the turmoil going on politically, economically and socially.

We will continue to filter out the noise by watching what our forecasting system is telling us, and suggest you do the same. As the rollercoaster ride continues…

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.

To your success~ James Paynter

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