Brexit chaos grabs headlines as the ZAR weakens

Brexit tensions have left international markets in an absolute shambles after all the chopping and changing at the 9th hour before the Brexit deadline.

The Rand, being one of the emerging market currencies prone to volatility, did not fare well in this climate.

From Tuesday's best level for the week of R14.24, the market steadily lost ground through until the close on Thursday...

...and before we knew it, it was back to R14.50 and above to the USD.

Another tough week for the ZAR - but with the Rand, you are never too far away from a fast turnaround - volatility can often work in its favour!

But for those that had our forecast from the previous week, this would not have been expected, as can be seen from the chart below, suggested a strong move up above 14.5600 to the Dollar.

Before we get into the week's activity, here was our forecast from Friday before all of this happened:

USDZAR_STU Click to enlarge

What could take it here was anyone's guess, but that is what the sentiment patterns were showing.

So what did happen that could ave provided triggers?

Let's dive in and see:

To begin the week, here were some of the biggest headlines from the 5 days:

  • Brexit chaos - extensions of the deadline, but no referendum, May's proposals being chucked out, once again...what next for the EU!
  • Global economy slows - it is as much a worry to SA as bigger economies, as there are many signs that the economy worldwide is heading into a possible recession phase
  • Standard Bank - big changes are coming for SA's 4th biggest bank, as it moves to a new delivery model
  • Load shedding - Eskom has continued to implement stage 2 load shedding through the week, disrupting business and personal lives alike.
  • Trump showdown - Democrats blocked his national emergency, setting up a showdown and possible Presidential Veto...! The Brexit debacle...sigh.
The world, and especially the EU, is tired of hearing about this now, but it continues to dominate the headlines as the deadline nears.

And its case really does prove the point of why we cannot trust news for market movements.

It has been a tumultuous couple of years for the EU, and in particular the British Pound as a result of all that has been going on, ever since the referendum of 2016. At the time, the GBP went for a complete loop, collapsing R1.40 against the ZAR on the day, and a further R3.20 in less than 2 months. It was devastation and uncertainty for Britain, as they had no idea what was coming next, or what Brexit really meant.

So, as the deadline nears, and the tumult continues, surely you would expect the Pound to have been weakening much the same as back in 2016?

Well, not quite...

In fact, the Pound is sitting 10.7% stronger against the Rand, since its low in Feb 2019 of R17.30 - and even more impressive, 7.2% stronger against the Dollar!

Crazy, but true...!

So, a case of "buy the rumour, sell the fact"?

Perhaps.

But it just proves the point.

Bad news does not equal a weak currency.

This week was more of the same Brexit uncertainty which has been in the headlines for 3 years:

  • Theresa May's new proposal was voted on and shot down by parliament by a huge 149 votes
  • Parliament then voted to delay Brexit departure date by at least 3 months...
  • ...but did not vote in favour of having another referendum to see if the public still want to exit
  • This leaves things in the balance, waiting on Brussels (the EU) to agree to a delay. They have already requested info on how this delay can be justified.
And this was how the GBP reacted versus the ZAR:


So, take your pick of what news you look at...

Economists will say the GDP growth was what boosted the GDP. Others will rightly say that 3 months of growth of GDP does not provide any indication or security as to what the future of the UK is...!

The USDZAR did not spend much time looking, as it bounced off the low on Tuesday to climb 30c higher:

USDZAR_STU

But Brexit was not the only story of the week. There was a whole lot more, such as:

  • According to Bloomberg Economics, the new global GDP tracker is putting world growth at just 2.1%, down from the 4% at the middle of last year. The economy has lost speed sharply over the last 12 months - which could be attributed to events like Brexit, US-China trade wars, Interest rate increases from the US Fed, and a terrible year for stocks. But this was to be expected, as all economies run in cycles, and a correction was due. This is the weakest that the global economy has been since the financial crisis of 2008...

  • On that note, Morgan Stanley has put their bets in on South African Stocks, that their boom is just around the corner. The expectation is that SA shares are lagging behind other emerging markets, and China's recovery "should filter through to South Africa". It remains to be seen, as everyone knows that logic does not apply to any kind of financial market!

  • Power supply issues continued for Eskom, as they were not able to meet demands once again, pushing loadshedding into the weekend. It remains to be seen what sort of an effect this has on SA's GDP when it comes to the release of Q1 figures for 2019, as the disruption for business is hard to try and put into a figure, but it is having a huge effect.

  • Economic figures were released on a number of fronts, as South Africa’s current account deficit narrowed to R110.2 B in Q4 of 2018, which is equivalent to 2.2% of the GDP - compared to 3.7% in the prior quarter. US inflation came through lower than expected, and as mentioned earlier, UK GDP was also better than expected, despite Brexit worries. SA Mining and manufacturing figures came through weakly once again, with manufacturing coming to a standstill and mining output shrunk for the 6th month out of 8.

  • Standard Bank, SA's 4th biggest bank has announced that they are moving to a more digital delivery model, resulting in the closure of 91 branches, and 1200 jobs being affected. This is not good news for those employed, but the reality is that new jobs will open up for those to manage the digital side of things, as South African banks all move in the same direction as First National Bank.

  • Lastly, on the US side of the pond, the US Senate voted to block Trump's declaration of emergency on the Southern Border, setting up his first Presidential Veto. Moments after the vote, Trump fired off a "statement" via his favourite Twitter account saying "VETO!". Which he did late on Friday US time,, sparking a late reaction in financial markets. What does this mean? Effectively, the veto will send the legislation back to Congress, which most likely does not have enough votes for an override, meaning that Mr. Trump’s declaration will remain in effect. Watch this space!
As for the Rand, it made a mini recovery on Friday, after breaking to touch R14.54, it ended the day at the SA below R14.40 with a later flurry after Trump's announcement...and that was the wrap!

The Week Ahead (18-22 Mar 2019)

So, as we head into the latter part of March, with a countdown to credit rating decisions, what could provide some triggers this week for moves?

We have 3 major market movers this week, which are likely to provide plenty volatility:

  • EU Decision on Brexit Extension
  • US Fed Interest Rate Decision
  • BoE Interest Rate Decision
  • And of course, Eskom load shedding worries and Trump's wars with the Democrats and China continue to provide extra volatility.
What does this mean for the Rand?

Well, as we have seen once again, the Elliott Wave Principle was ahead of the curve, suggesting a move higher into the 14.56 to 14.92 area before topping.

At present, we are looking at certain price levels to confirm whether the market has topped out, which could affect our near and medium term outlooks.

For more details, and a roadmap on where we expect the market to head the next few days weeks and months ahead, simply join us today and give our free trial a shot.

We are here to help make your forex experience decision-making more profitable - with less stress, time and effort.

To your success~

James

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