Once again, the Rand has defied expectations. What could cause the local unit to strengthen to 27 month record levels against the Dollar?
The economists scrambled for ideas, explanations and ideas as bemused onlookers couldn’t see the reasoning, once again evidencing the irrationality of markets – and why we cannot look to fundamentals or news but rather market patterns.
The Rand is now touching levels more than R5.50 stronger to the Dollar since last year April – and it’s best levels in well over 2 years.
These numbers are nothing short of staggering!
It is time for us to take stock and see if we could have seen this coming… …and what is coming next?
Key Moments (24-28 May 2021)
First things first, our outlook on Friday the 21st set the tone for the week, giving us where the USDZAR market was expected to move over the coming days:
It showed us trading at R13.95, with the potential to head down lower into our target area before bottoming out. The target area sat at R14.00-13.60, so while we were expected to trade lower, the trend reversal was imminent…
And we sure had an interesting week of events to help trigger market movement:
- S&P & Fitch – the long waited ratings review finally yielded some results as to where things stand…what next for SA’s investment grade?
- Looming Lockdown – just as other countries are coming out the other side, it looks like another lockdown locally is imminent.
- US-China Trade – a new era of trade talks are beginning under the Biden Administration, and everyone is watching with bated breath!
- Inflation – the playing field has changed since talks were last active, especially with things like Inflation – the question is whether it is temporary or permanent?
- Eish-kom – the local power supply is still under enormous strain… how will Eskom cope in the colder months of this year?
And to start with where we found ourselves on Monday, the Rand traded around R13.94 at the open, as investors seemed to not have a care in the world as to SA’s long term issues.
The ZAR had been boosted by news from S&P Global and Fitch, who both affirmed SA’s current rating, maintaining the position of 3 points below investment grade.
While this is a sorry state of affairs, investors don’t seem to be paying much attention to it, and rather some of the agencies comments, such as Fitch saying SA’s state finances have “improved substantially”, despite continued “substantial risks to debt stabilisation”.
Fitch had expected SA’s Gov budget deficit to hit 15.5% last year, but instead this was almost a third lower at 11.1%. Along with that, thanks largely to commodity prices, SA’s external finances have weathered the pandemic well.
Small encouragements, but really, it is just proof that investors will take note of the news that they want to hear – based on their sentiment, in this case just shutting out the negative.
Such as the looming lockdown…
With surging of cases and deaths locally, it seems from government comments that another lockdown for Wave 3 is inevitable (despite lockdowns globally having shown no benefit whatever) – the result for the economy will be disaster.
So surely the Rand tanks as Ramaphosa is expected to address the Nation any moment to decide on what steps he will take on the spike in cases? Nope. Just the opposite, as the Rand pushed down to R13.67, a record level in the last 27 months!
The local unit certainly never ceases to surprise!
And then in other news:
- US & China trade is now back in focus once again as talks restart for the first time since the Biden Administration took office. The playing field has changed substantially, and it remains to be seen whether the Biden camp will maintain the same tough tactics or look for compromise to get a deal done. All of this is now taking place over the backdrop of Biden requesting that there is further investigation into the source of the pandemic that faces the world right now – with mounting evidence pointing to the lab at Wuhan. As always with China, anything said about them affects any discussion, and the timing from that perspective could not be worse… watch this space closely!
- Inflation worries also are at the forefront of talks around trade as economies face a new era. SA’s Produce Inflation accelerated 6.7% per April’s figures, and the US Core Personal Consumption Expenditures increased 3.1% in April from a year earlier. What does the future hold as endless money printing begins to really shape the days ahead?
- Locally, the concerns around power supply from Eskom continue to plague an economic recovery, as more load shedding was announced at short notice for Wednesday and risks of more remain high. They fired their chief procurement officer with immediate effect Friday, as the need to reverse years of corruption was becoming more critical by the day. Separating Eskom into 3 pieces is still on track, but will cost R500 million just to do that. What next…?
Back to the local unit, we saw the ZAR move through choppy waters to the end of the week, eventually closing a touch below R13.80/$.
What an amazing run, as the Rand defied all expectations once again… …BUT what do the weeks ahead now hold?
The Week Ahead (31 May – 4 June 2021)
As we look ahead to the first week of June, we realize we are nearly halfway through the year! Time flies…
In terms of events, there were a number to watch out for:
- SA – Balance of Trade, Unemployment Rate
- US – Jobless Claims, Nonfarm Payrolls,
- EU & UK – BoE Speeches, Monetary Policy Report, Retail Sales
So some ‘biggies’ in terms of potential triggers – not that the market needs economic releases for triggers, with all that is going on in social, political and financial arenas globally. What does this mean for the Rand?
Based on our analysis, it does look like the local unit may be starting to run out of steam, and we will be watching some key levels over the next few days to confirm what our Elliott Wave based forecasting system is telling us is likely to play out for the for the days and weeks – and possibly months – 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.
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To your success~ James Paynter