When it appears to be too good to be true, it normally is...

...and that is what we got this past week.

A bump back to reality.

A bump back to reality of real on-the-ground factors which are hurting the Rand - which need to be taken account of in the big picture, as the economy continues to struggle.

It was unfortunate that after such a good run, we saw a near 40c crash-flash from the Rand in a day.

This, however, is all part of the game.

And we just have to keep on tracking the patterns of the Rand all the more closely, to ensure we do not caught out by a change in the wave count. Because before you know it, the market has retraced, and you are caught out again - which was just what we saw on Friday.

Let's take a look at how the volatile week played out...

Our forecast on Friday showed the Rand at R13.26, and an expected bottoming out in the target area of 13.26-13.05 - so it looked like we could be seeing some rand weakness during the week...

USDZAR_STU Click to enlarge

Here are a few of the big talking points that we had during the week:

  • Interest rate unchanged - the major event from this week was SARB's expected decision on interest rates, but they were left unchanged, as expected. On the back of that decision, we had some heavy losses, despite it being expected - confusing much?
  • Ramaphoria becomes Ramaphobia - a sharp change of sentiment toward the new South African president has clearly happened, as strong optimism has turned very negative.
  • Trump-Putin 'blackmail'? - this American conspiracy theory gained more force this last week after a confusing press conference in which Trump did not condemn or blame Putin for the interference in the US election - thus adding fuel to the fire on the debate as to Putin having 'dirt' on the US President.
  • Brexit - the situation continues to become more and more confusing the UK exit, with Theresa May clearly struggling to maintain control and support.
  • US-China tensions - these were thankfully put on hold this week, with the global focus just being on other things such as the Trump and Putin debacle...this allows the situation to simmer a little more, and hopefully calm down.

A retracement was expected by many heading into the week, but the extent and sharpness of it was of concern.

We keep saying it, but we have not had a period like this for the Rand for some time. It has been a ride of note since the change in sentiment back in February. What this week was all about, was that bump back to reality.

It has not sat well with many that Ramaphosa has been more talk than he has been action, and this is beginning to take its toll.

Problems like unemployment are not going away, and there is no clear pathway that has been mapped out to change it in the future - so how does Ramaphosa intend to bring more investment into the country with that being the situation? It is a brave call from Saudi Arabia to pour as much as $10bn into the energy sector, and it remains to be seen as to whether others will follow suit, with this being a confidence builder.

So this was what the first half of the week looked like:

The picture says it all. A picture of strength which so quickly became one of vulnerability.

And what provided the trigger for some extra oomph was in fact the most anticipated event of the week - the SARB Interest Rate decision.

In the build up to the event, the expectation was for the rate to stay the same - and the Rand weakened 15c before the announcement...

...as expected, it was left unchanged - and with that, it drove the Rand even higher toward R13.60, eventually breaking to R13.62 early on Friday morning.

At that point in time, the market was in severe danger of erasing ALL of the gains over the last 2 weeks...

But let's take a look at some of the other events for the week -

  • USA and Russia relations dominated the headlines for the duration of the week, following a very week showing from Trump in Sweden, during a Press Conference with Russian President Putin. While you can understand the dissatisfaction of the public at Trump not holding the fire to Putin at the conference, the fact is that Trump's words and rhetoric often do not coincide with actual policy changes. But let's be frank - Putin has his own agenda and cannot be trusted. And he will take advantage of any apparent weakness in US resolve - as Obama found out with Crimea.
  • Brexit has been holding headlines for some time now, and it does not look like stopping. The movement is gaining force and the next few months are going to be quite something to watch. The different aspects and problems of a British exit from the EU are far from understood amongst many, such as someone like British Airways possibly being banned from Irish airspace after Brexit.

    Ireland would in fact be the most English speaking country in the whole of the EU, should Brexit proceed as planned - a very interesting change of events.

    What is clear is that Theresa May, the Prime Minister, is hanging on by a thread, as she struggles to maintain unity and support in the Commons chamber. How long will she remain is the question, as trust is clearly beginning to dwindle...? For now, the GBP is suffering under the uncertainty of the position...

  • While Trade War took a back seat this week, there were still a few rumblings. One of them being Trump's comments that he is prepared to tax ALL goods coming into the US from China should he need to. Based on his actions in the debacle thus far, I would not put it past him.

    As SA Reserve Bank Governor Kganyago said, "...we will be the immediate losers as small open economies. But overall, as a global community, we will all be losers from the trade wars. "

    This is probably closer to the truth than we all realize...but that said, Trump is clearly intent on reversing a trade deficit that is both massive unsustainable.

  • BRICS bank, backed the group of Brazil, Russia, India, China and South Africa, plans to lend as much as R8bn to South Africa during the course of this year, in an effort to level the playing field the 5 countries. This just increases SA's dependency on those nations, which is not a good thing at all...
  • While the SA interest rate held steady, there are expectations for further hikes by the US Fed as per Chairman Jeremy Powell. President Trump was not impressed by this, saying it was not profitable for the US to keep hiking the interest rates - but unfortunately, the market dictates the rates, not the Fed, or Trump - and here is the proof.
  • SA's growth forecast did not make pretty reading, as it was lowered to just 1.2% for the whole of 2018 - not encouraging at all...! Perhaps this was on the back of news that initial figures on SA's gold mines perhaps were too high, and it is actually less than 20% which are profitable!
    But back to the Rand.

Just when it looked like we were heading back on a one-way ticket following the interest rate decision (a wise one), the local currency dug in its heels and fought back.

And made a pretty impressive job about it too, but not enough to regain all that was lost during the week.

But still, an encouraging and a strong finish to the week.

The Week Ahead (23-27 July 2018)

Blue Monday it seems, as the Rand was unable to start where it had left off on Friday, and has steadily lost ground.

There are several medium and high impact events this week, mainly out of the EU and US, to keep the volatility going, so another roller-coaster ride is likely.

It appears there is still some underlying momentum to push the market higher, but based on the preferred Elliott wave count, it is unlikely to be one way traffic.

We will be looking for the market to show its hand over the next few days, and confirm the current wave count, or signal another is in play.

That is the beauty of the Elliott Wave Principle. It not only gives you the expected trend in various timeframes and degrees, but also gives you levels at which point this outlook would be invalidated.

As we said last week, the Elliott Wave Principle is not a perfect forecasting system (show me one that is!), it is still the best we have found for giving us and our clients the information we need to make informed, educated, and objective decisions.

And you can do the same - for free. Test-drive our forecasting system yourself for 14 days free - and tell us what you think.

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All the best for the week ahead,

James Paynter

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