USDZAR Weakens over R13/$ - where to from here?

Well, that was quite a week...

Things looked pretty rosy to start.

And then ended not quite on the same score.

Such swings of 'fortune' are what brings the level of volatility we have come to expect over the past few years from the USDZAR.

We need to reanalyze our figures to bring them up to date, but when we last updated them in 2016, the market had moved on average 30.6c every day during the course of that year...

...and 24.4c per day since 2015!

So major swings have certainly become something we are accustomed to.

This week was nothing different.

But...

The question everyone was asking:

"Has the USDZAR bottomed out for good?"

Good question.

Let's start by reviewing what happened.

How It Happened (26-30 June 2017)

Another day. Another week closing off.

With the Rand at R12.9191 on Friday, we did our forecast for the next few days ahead.

The target for the Rand was to duck down into the R12.85-12.67 area. After which, it would then weaken higher, targeting levels over R13/$..it was going to be an interesting week.

USDZAR_STU Click to enlarge

The markets closed for the weekend shortly after that.

And when business hours began on Monday SAST, the USD/ZAR sat at R12.90, and it was time to get our teeth into the week.

Or rather, we would watch on as the market did that.

And right off the bat, the market was on the move...slowly but surely.

It was due to be a quiet week as July Northern Hemisphere holidays had begun, and no major market events were expected.

To clarify - expected.

That is no guarantee.

And for Monday at least, that held true. The market strengthened down to R12.81/$ - a move which sent it into our target area.

Now for the retracement...

The market closed in the mid R12.80s, and the first day of the week had closed.

Events that were worth watching in the days ahead were:

  • Fed's Yellen Speech - Tuesday
  • ECB President Draghi's speeches - Monday/Tuesday
  • US Goods Trade Balance - Wednesday
  • SA Balance of Trade - Friday


And Now for the Economist's Point of View...



...and it seems they cannot make up their minds

"Until South Africa exits the World Government Bond Index or there is another external shock, the rand is expected to trade at around R14/$ towards the end of 2017, said Peter Attard Montalto. This is somewhat higher than Nomura’s previous forecast of R15.50 in April, which forecasted that level towards year-end." - this according to Fin24...

Sound like trustworthy information to you?

I think not.

Onwards to Tuesday...

With the Rand around R12.85 when business opened on Tuesday, one more stab lower was expected.

After that - the market to bottom out and head closer to R13/$ and above.

And despite news from Monday that the Deputy Finance Minister was taking aim at SARB, the Rand traded stronger on Tuesday morning.

It went as far as R12.802 to the Dollar around midday...

...and that was as far as it got.

Now, the bottoming out had kicked in. And the Rand spiked.

Fast.

By 2pm, it traded at R12.93.

By 9pm, R13.03/$!

Our forecast had been perfectly validated, with a bottoming out in the target area and then a weakening of the Rand right into our expected area.

Wednesday dawned.

And in the aftermath of Tuesday's antics, the cause for the Rand's spike was put down to EU Central Bank's President Draghi.

His comments on tapering its bond buying program were seen to be damaging. How this could have such a drastic effect is beyond us, but this is what it was put down to. It could well have been the trigger...

In other news, eyes will start to shift to the weekend’s ANC Policy Conference, which is sure to be a joyous affair...

Anyway, back to the markets.

What did Wednesday have in store for us?

Well, firstly, the market opened a touch below R13. But not for long.

By 10am, it had made a further high, this time of R13.07 to the Dollar, moving in line with our forecast. It had all gone according to plan so far, and our next forecast was due in a few hours. However, the Rand had other ideas for how the afternoon would go.

The market topped out at that R13.07 area, and pushed much lower during the course of Wednesday afternoon and evening.

By the time our forecast was released (see below - click to enlarge) the Rand was trading around R12.9378 to the Dollar. Our forecast showed to expect a bit more Rand strength, where the Rand would bottom out shortly, and then head higher into the R13s...

USDZAR_STU Click to enlarge

Big news for Wednesday was the Euro/US Dollar, as it broke above 1.14/$ for the first time since 2015. This was when the US Fed hiking cycle started - quite an achievement!

Alongside further Euro gains, this is said to signal a reversal of the USD strengthening cycle...

In other news, the Competition Commission bank collusion case was on the move.

They were still working on this, but had made a blunder of mixing up names of legal entities, resulting in a delay.

Who knows how long this one really will take to play out...

Thursday...

The first news of the day was that the market had strengthened all the way to R12.86/$ overnight. Trade opened only a touch under R12.90 on Thursday morning.

This was very much in line with our prediction of the market strengthening before bottoming out. After that, the tables turned, and it seemed the Rand had bottomed out.

And although rather jumpy, the market trended upward the whole day...

Soon after (early evening, in fact), it was well over R13/$ again!

Despite expectations of a quiet week, the market was playing its games as always...

A high of R13.08 was reached, before it retraced around R13 at the end of the penultimate day...

And when Friday finally rolled around (it had sure been a long week), all we were hoping for was a quiet finish...

Everyone appeared to see the Rand at risk, and USD weakness was seen as the only thing keeping the local unit’s losses in check.

(To make matters worse...) The ANC Policy conference starts today. Expect fireworks with radical economic transformation and land redistribution being the two biggest talking points.

But it seemed like the tide had turned...

The Rand weakened throughout the day on Friday, heading higher above R13.10/$, moving as per our forecast from Wednesday...

The week eventually closed out around R13.10/$, and it was time for the weekend...

The Week Ahead (3-7 July 2017)

So what is there to say on the week ahead?

One thing to watch is what this weekend brings from the ANC policy meeting - sparks tend to fly at these events, and there is plenty of gunpowder nearby for the stray sparks to hit.

While this is 'unexpected' news, it is still factored in by the Elliott Wave Forecasts.

So it needn't change our outlook. But it sure could be the trigger.

This next week will be so important to see if the USDZAR has bottomed out in the short term...

In terms of events...

There is enough on the table to keep us interested - and we would advise you keep your eyes on the important ones, such as the Non-Farm Payrolls.

Signing off - all the best for the week ahead,
James

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