South Africa

The ZAR took some strain early on in the week on the back of two consecutive downgrades, first by Moody’s then by S&P, but the currency came back pretty strong towards the end of the week finishing at strong levels of 10.05 and 14.80 versus the USD and GBP.

It was another volatile week and the market is currently characterised by huge intraday swings and ranges, with the market being dominated by a sense of unease and fear. It’s a scary place to be. On Thursday afternoon we closed around USDZAR 10.45 with the market shooting up to around 10.80 in the overnight markets only to open the next morning SA time around 10.15. This isn’t a market where you want to be taking chances and GBPZAR 19.00 is now a distant memory. Well done to those who jumped in at those levels and converted foreign currency to ZAR.

The current move downwards though now provides a similar opportunity for those wishing to move funds out of SA. My opinion within the major trend is that the ZAR is going to move weaker and it seems that both Moody’s and S&P share this view. The only amazing thing I find is that the two leading ratings agencies in the world take so long to downgrade an economy on the back of a threatening deficit of 8-9% which has been there and steadily increasing for a number of years. I’ve been championing this problem for about 12 months but of course I don’t have the same platform and listenership to have my opinion heard.

I believe that a combination of the above deficit (which one day is going to be under major funding pressure) and a looming credit crunch in the local economy are going to really put some mega pressure on the ZAR. At the moment, everyone in SA and everyone with a vested interest in the SA economy has their heads in the sand and don’t want to see what’s coming. I think it could be very serious for the local economy and I would say that with real inflation currently around 20%+, falling employment, massive consumer credit levels all on the back of a property boom I think we could see some major problems on the horizon.

So fundamentally, I’m always leaning towards a weaker ZAR.

From a technical perspective, the major trend is weaker with the ZAR emerging from a long term high within a very large basing pattern. The tide has turned and technically speaking the ZAR is on a weakening trend for the next few years.

What we are seeing though within the short and medium term trends is a market that’s struggling with the current volatility to generate a clearly defined weakening trend. Within the bigger picture we’re slowly but surely moving weaker but the actual intraday and intraweek moves are distorting this picture and the general overall market bias towards a weaker ZAR. This timeframe is very cloudy at the moment and it would take a very brave soul to try call the short term type of moves as we’re jumping around quite aggressively at the moment. All banks have widened the interbank spread on the back of this volatility and when the banks do this you can be sure that they’re pretty nervous too. In a way it’s them basically admitting that they also don’t know what’s happening.

So our key technical levels on USDZAR for this week are as follows:

10.26 – Short term topside that we need to see market move above to get topside momentum going again
10.10 – Current Market Price
10.00 – Key psychological support level
9.91 – Last week Friday low
9.78 – Low from last week. Should provide good support

I think that technically we should see the market quite well supported this week as the market seems to have completed a short term downward correction.