The Rand holds, but for how long...?

Another week of uncertainty passes for the Rand...

It has been such an extended period of strength for the ZAR, that persons might have forgotten that these trends don't last forever - and when they do, most are caught by surprise.

And the way the charts are looking - they may not have long to wait.

The USDZAR is now significantly higher than its low of R11.50 in February, and its trend is looking strong to head higher.

However, this is not all bad news.

What many people do not realize is that the country cannot survive with a currency that is too strong, as it means South African goods and services become too expensive compared with our trading partners - resulting in reduced exports, and increased imports ... a damaging trade deficit ... and the net result being loss of local manufacturing and jobs (hence President Trump's resolve to turn this damaging trend around in the US).

That said - a currency that is too weak or volatile is also not good news for the economy...

Anyway, on to reviewing this last week.

Our call on last week Friday was for the market to top out shortly, and retrace lower. However, once that target was hit (11.84-11.70) then we could expect the Rand to trade even higher...

USDZAR_STU Click to enlarge

There were a few important takeaways from this week:

  • GDP growth - a surprising 1.3% growth on 2016, during the course of 2017, despite adverse conditions to GDP growth!
  • Listeria saga - the big talking point for the week, as hundreds died from a listeria outbreak...
  • VAT Hike - despite many persons being unsupportive, the VAT hike plans are rolling onwards. Trump agrees to meet with Kim Jong Un - who would have thought...?
  • Trump tariff plan - the US President wants to impose 25% tariffs on steel imports and 10% on aluminum...a shock for most, but he was not backing down!
  • US Non-Farm Payrolls - US employment numbers were huge, with 313,000 jobs added, and employment remaining at just 4.1% - the best levels for 17 years

So what were the big moments this week?

One of extremely negative nature was the Trump tariff plan on steel and aluminum. While it is hard to tell what the direct effect would be on SA, it is clear that it will affect the entire world due the the US's global presence.

The bulk of US steel and aluminum comes from China - but Trump won the election by promising blue-collar voters in Midwestern, steel-producing states that he would get tough on imports. Now, he’s making good on that vow.

What the worry is in the States (and elsewhere), is that this idea will end in a trade war.

And increased inflation. Neither of which are good for the markets.

Between this and Trump's top economic advisor resigning over this plan, the stock markets had rather a wobble...

...what is clear is that Trump is pushing ahead with the plans which got him elected, with his eyes on the prize - which is an America that once again has a robust manufacturing sector and is a net exporter - i.e. more self-sufficient than it has been without over-reliance on imports.

This makes sense, as the USA's reliance on the likes of Chinese imports has been extremely damaging to local manufacturing and employment.

And what does this eventually mean for the Rand? Well, it is going to be an interesting transition period for the US and the Dollar in the coming months, and Dollar weakness over the last year or so has been the main driver of Rand strength - so it is important to keep an eye on these things...

It was a fairly mixed bag this week, and much the same for the Rand. However, it moved as per our forecast into the target area on Tuesday/Wednesday, before bottoming out and rising above 11.9000...

....but then dropped again when Non-Farm Payrolls came out on Friday.

US Non-Farm Payrolls is a big indicator of US economic - and the numbers were seriously impressive, with 313,000 jobs added (economists had expected 203,000). Over the past 5 months, 242,000 jobs have been added on average, with employment levels holding at 4.1% - the best levels since December 2000!

Say what you like about Trump - he is certainly putting some much-needed vibe back into the US economy.

But once again, this was an example of the market reacting contrary to rational logic:

VERY positive US news...

....yet the Rand immediately strengthens against the Dollar???

Please let this be a reminder:

While these big events (such as Non-Farm Payrolls or even credit rating decisions) may well provide an excellent trigger for market movement, it will not change the trend!

Many believe these events are what DRIVES the markets - and they could not be further from the truth.

Still skeptical? Then please read in our Fin24 article from this last week...

And for some more positive local news -

SA's GDP Growth for 2017 was a surprisingly good 1.7%! Who would have guessed? This must have had a lot to do with the positivity toward the back end of the year, when investors and general business began an uptrend, as the Rand strengthened.

While Cyril Ramaphosa has promised a new dawn for the country, it has not been seen just yet. However, Bloomberg news this last week said that "Cyril Ramaphosa has been a hit with business leaders and investors during his first three weeks"

It seems that the Credit rating decision from Moody's is just getting pushed out further and further, as we know hear that it is due for the 23rd of March - still some time off...many are just hoping that nothing catastrophic happens between now and then!

New (and old) Finance Minster Nene does not seem concerned about the situation.

It seemed that despite news of land expropriation, Nene was confident after speaking to Moodys that SA have staved off the fated #JunkStatus one more time...

This remains to be seen...

And with that the Rand ended one of its less volatile weeks around 10c stronger than where it had started - not a bad effort indeed!

The Week Ahead (12-16 March 2018)

So, we start the week well under R12.00 to the Dollar with a few events this week that could provide triggers for some direction.

While there could be some short-term strengthening, our forecast models are showing this may be short-lived.

I trust last week has been a lesson in not looking to market news for direction.

And that is why you need an objective scientific-based view and framework in order to make educated and informed decisions...and ones that are not based on emotion, popular opinion, or gut-feel.

That is what we provide for our clients...and I would invite you to see what it can do for you in improving your exchange decisions - with less stress, effort and time.

Get The Latest Forecast Now

Kind regards,
James Paynter

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