Market News 21 August 2020

What we know

As regular readers will know, our conviction over the past couple of months has been that any sustained rally under current circumstances is hard to justify. On both the two previous occasions (early June and early July) where the Rand rallied to 16.50 and stronger, we suggested that it was simply too strong and that clients should be externalising funds.

While July’s strength probably lasted longer than we had thought, our view remained consistent and, since the start of August, very accurate in forecasting the ZAR’s trading levels.

While many may point to headlines about COVID, the state of the South African economy, or any of a number of particular issues on a given day, we don’t buy into these extremely short-term and over-simplified cause-and-effect stories. Instead, we look at the bigger picture – where the world is currently in terms of fighting the virus, keeping the economy healthy and the various political events playing out – which in turn has led us to believe that the market’s assessment of world fundamentals and the associated risks, has been somewhat misguided and that we are now seeing an appropriate correction in the Rand’s trading levels take place.

We remain comfortable with the Rand trading at current levels as it is now in what we believe to be an appropriate trading range, between 16.90 – 17.30 as we have been suggesting it should (the two thick green lines below).

 

What we’ve been saying

As a recap, especially for recent subscribers to this commentary, what follows is our weekly opinion and outlook over the past 6 weeks:

10 July: CP forecast range 16.90 to 17.30 – ZAR trading at 16.84

We should not be trading up here! Even though we’re not that far off the 16.90 high forecast for the week, given our bias for further weakening we struggle to understand why traders are favouring the Rand under current conditions. Add to that the possibility of load-shedding rearing its head again and our conviction is that weakening is due.

17 July: CP forecast range 16.90 to 17.30 – ZAR trading at 16.66 

Despite the Rand not retreating to trade within our forecast range for the week, we see no new evidence that which makes us want to change our view that the current strength is not sustainable. Furthermore, given the concerns about our government’s ballooning debt, the impact of the coronavirus and renewed load shedding putting further pressure on an already strained economy, we expect the Rand to remain particularly volatile and our bias remains to the downside.

24 July: CP forecast range 16.90 to 17.30 – ZAR trading at 16.66

As difficult as it may be, we still stand by our conviction that the Rand is too strong. Not only that, but over the past few days, we have seen it strengthening further! So, despite stronger trading outside our predicted range for the week, it comes as no surprise that the best levels failed to hold. The channel in which the Rand has been trading since late June appears to have been broken which could signal the end of the recent rally. This technical view together with our fundamental outlook, keeps us favouring a move to 16.90 and beyond 17.00 in the near-term.

31 July: CP forecast range 16.90 to 17.30 – ZAR trading at 16.96

It had been a while since we have touched the stronger end of our forecast range of 16.90 – 17.30, so it was reassuring to see our predictions come true as the upward trend was finally broken and we anticipate that this range should now be the area in which we see some short-term consolidation. Earlier in this commentary we voiced our opinion that the USD could quite conceivably strengthen by 2% in the short-term and to put this in perspective (all else being equal) such a move would see the Rand lose 35c against the USD. From the current level of 16.96 at the time of writing, that would imply a move to 17.31.

7 August: CP forecast range 17.30 to 17.80 – ZAR trading at 17.52

After such a rapid move weaker, we now think that we are potentially into oversold territory and would think that further weakness should be capped around 17.80 in the short-term. The biggest caveat here for us remains the fact that the USD, too, may be oversold and due its own rally – that of course would not bode well for ZAR.USD. Our conviction in terms of the short-term ZAR direction is now fairly low and we rather favour seeing how next week’s trading plays out, in order to see some kind of consolidation and a possible new trading range.

14 August: CP forecast range 16.90 to 17.30 – ZAR trading at 17.36

After weeks of saying the Rand is too strong, we’ve finally been able to say that we think a slight strengthening may be in order. We do reiterate that we are not suggesting a move back to 16.50 – as things stand this could not, in our opinion, be justified – but rather that we may see a move back to the low 17’s. As always, any unforeseen shocks could derail this scenario.

 

What we think

 

We don’t believe in trying to predict or time the currency markets but rather to offer clients guidance as to how we see the world and what the current outlook and risks may be. In truth, given the volatile and unpredictable nature of currency markets, very high conviction calls may only happen a few times a year.

Too often we see individuals trading either with hindsight, hope or a combination of the two. While clients who moved funds offshore during July may have got a bargain (as things stand) we typically suggest to clients to not look back to what may have been. Rather assess your unique requirements in the current environment, consider what levels are acceptable to you and what risk you are willing to bear in terms of market volatility and potential weakness, and make an informed decision when regarding your transfer.

As always, please feel free to discuss this with your personal dealer.

Our range for the week ahead remains 16.90 – 17.30.

 

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Have a great weekend!