Is this becoming the new norm for the Rand?

It is hard to believe just a few months ago it was week after week of strengthening for the local currency, coming out of the December rush.

The change of sentiment has been so stark, from the euphoria & positive emotion flooding into the market up to February...

...suddenly reverting to negativity & disbelief as everything has gone awry.

Emotions very often change gradually...and then dramatically.

The fear and greed scale we showed you last week is a great example of this.

As of now, Rand negativity is paramount, with the Rand reaching its worst level of 2018...

...extending its losses to more than 9.5% in Q2 of 2018

...and with seemingly everything going wrong around it.

It was a tough week, but let's take a look at how it played out...

With the Rand at an edgy position of R13.07 on Friday, we released our forecast showing that we expected a break lower into the 13.05-12.89 before the Rand would then continue its trend higher into the 13.28-13.54 target area...

...quite a complex one, and we were going to have to watch the markets carefully, once again.

USDZAR_STU Click to enlarge

Key moments -

  • Rand's worst level of 2018 - the poor local currency continued to rush upwards, at a seemingly impossible-to-stop pace.
  • Fed Rate Hike - as expected, the Fed hiked the rates once again, further hurting the Rand and other emerging countries...
  • Trump & Kim Meeting - what seemed impossible just a few months back has happened, and while there are many varying opinions, it appears that it was, for the most part, successful...
  • Load shedding - it seems the age old nemesis is back again for SA - due to an Eskom botch-up...
  • China tariffs - the promised $50bn in tariffs on Chinese goods has been signed off by Trump - now to see what effect this has on US-China relations - and the global economy!
  • Cryptocurrency capitulation - after the rollercoaster ride toward the end of 2017, it has basically all been downhill for Bitcoin and Cryptos, as the market cap fell even further this last week.
  • Soccer World Cup - the biggest global competition got underway on Thursday! The month long tournament is being hosted in Russia.

After being the worst performing emerging-market currency during the previous week, many were hoping for a better 5 days. Our forecast however, suggested we were going higher...

The big event for the week: US Fed Interest Rate decision

Last week it was the GDP figures which provided the trigger. This week, the question was whether it would be the Fed Rate Hike...?

It is always hyped up to be one of the major economic events, and all eyes were on it.

Alongside that, the other big global talking point was the unthinkable from a few months back, taking place right before our eyes: Donald Trump having a constructive discussion as to peace, resulting in North Korea's Kim Jong Un signing a document stating he is committed to 'complete denuclearization' of North Korea...

While this is being seen as a huge event in terms of peace globally, it remains to be seen whether he actually intends to do so or not...

...and whether you can trust a Communist dictator that is prepared to execute some of his own family with anti-aircraft guns is the million dollar question!

Anyway, by the time we got to the end of the week, it was not a pretty picture for the Rand...

Another week. Another set of losses for the ZAR.

After strengthening close to R13/$ as per our forecast above, it moved into our second target area in the days following, pending a topping out in the R13.28-13.54 area...

It definitely was looking like nothing was going right for the Rand, with:

  • US Fed hiked interest rates as per expectations, which was not good news for the Rand or any of the emerging markets. We saw the Rand weaken over 10c just in anticipation of this, only to stabilize on the announcement. Classic "Buy the rumour, sell the fact"...?
  • ECB held interest Rates stable, but made the fated announcement that they were closing down their Bond-buying program - another set of bad news for the emerging markets.
  • Load shedding announced on Thursday, which continued on Friday, with expectations for it to continue over the weekend too. It was just one week ago that Eskom had promised no load shedding was going to be necessary...only for it all to change, due to "intimidation and sabotage" in some of Eskom's power stations...

    ...this was on Thursday. Then on Friday, it was blamed on power generating units which broke down. No mention of sabotage was who really knows what is going on?

And then we come to the economic figures - it did not make pretty showing:

A 42% gain in Rand volatility over the last week -

the biggest quarterly increase since 2013.

But it has not only been the Rand though, as the Russian, Turkish, Mexican and Brazilian currencies were all taking a pounding.

Bond data came out. Yields were down 1.5 basis points. And outflows were at record levels:

So...very tough times for the Rand!

In other news...

  • Ramaphosa's economic advisor said after the G7 summit in Canada, that major economies are still enthusiastic about South Africa, and that a compelling case for investment just needs to be presented.
  • However, Bloomberg painted a bit of a different picture, as they warned that the Rand's Ramaphosa honeymoon was over. This did look more accurate, as they highlighted the cold, hard facts, that the Rand had lost all of 9.5% during Q2 of 2018. Investors had clearly taken a bearish turn.
  • Cryptocurrencies endured a torrid week, falling further as the market cap for the industry fell below $300bn. When it hit its low for the week, the market had lost almost 70% in value since its overbought state at the beginning of this year - a shocking turn of events for those who jumped on the bandwagon of hype & euphoria just 6 months ago.

And that was about it for the week, as the Rand closed out in the mid R13.40s - still trading at its worst levels for 2018...

The Week Ahead (18-22 June 2018)

The Rand started the week rather battered and bruised in the mid 13.40's with the immediate outlook being for the bearing to continue.

However, we are approaching some key resistance levels which we will be watching closely to give us some hints on direction for the coming weeks.

It is at these particular times that emotions tend to take over - whether it is panic and despair (for importers) or greed and complacency (for exporters).

And it is at these times, more than ever, that one needs to have an objective view of where we terms of the long, medium and shorter term trends to keep the current move in context.

We will be watching this market very carefully over the next few days, and looking to see whether key levels and the present preferred wave count holds true.

It is certainly going to be another humdinger of a week, so hold on for the ride!

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Kind regards,

James Paynter

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