Rand gains over 70c after being junked…?
WELL, believe it or not, here we are into the first week of December already.
Time sure has flown … and 2017 has been nothing short of a blur.
In fact, just the last week or so has been a blur! Especially for economists, who were left scratching their heads for answers, as the rand strengthened over 70c in the days following #Junkstatus.
Who would have believed it? It has been nothing short of an amazing recovery for the rand – and one that few would have seen coming – aside from those following our Elliott Wave forecasts.
The accuracy with which the Elliott Wave Principle operates is sometimes quite scary... read on to see how it predicted the #Junkstatus turnaround.
Our dollar/rand forecast released on Friday November 24 was post the #JunkStatus crash – and it showed that while the market had lost considerable ground, it was due to top out very shortly… which would then see it falling sharply to test 13.80.
(Now remember, this was just after the rand had lost 33c in a flash following the announcement – with every anticipation that Monday would see this continue.)
Figure 1USDZAR Short-Term Forecast - Nov 24 2017
And while it just failed to touch our upside target, what followed was so close to our forecast, it actually astounded even us, the Dynamic Outcomes team.
The below shows the amazing reversal on Monday and the days following:
And those looking for any news to back up this move would have found nothing – no economic, political or logical reasoning behind the rand’s movements. Nada. Nothing.
But that’s what it did – as our analysis anticipated it would.
The week following #JunkStatus sure began with a bang. After a rollicking close on Friday leaving the rand in tatters, well over R14/$, everyone was expecting the worst.
Currencies Direct’s commentary on Monday morning said the following: “The local unit opens at 14.10/USD this morning, but with investment outflows of R2bn expected from SA further weakness could be on the cards.”
Other economist views were on a similar line – it did not look good for the rand.
Sable International’s commentary said: “Analysts are all in agreement though, the weeks ahead will be particularly volatile for the rand. Expect things to only simmer down, if ever, when we get beyond the ANC elective conference.”
Negativity. Everywhere. Surely the rand was just going to weaken?
As shown in our chart capture earlier, the rand instead gained handsomely on Monday – in fact, by mid-afternoon it had touched R13.67/$, almost 50c from where it was just hours before.
Amazing? Yes. Surprising? Yes, but expected – to those relying on the the Elliott Wave Principle (it never ceases to astound).
Monday had enough in it for a whole rand review, but there was still the rest of the week left.
On Tuesday, President Jacob Zuma announced his plans to rejig the country's economy and credit rating: R50bn reduction in government spending during 2018; R30bn tax hike...
For some reason, many believed only the latter would ever actually happen (how does that saying go? The only two things you can be assured of in life are death and taxes).
On Wednesday, the market opened at around R13.67/$, having kept fairly stable on Tuesday.
However, North Korea had done another ICBM launch sometime over Tuesday evening and Wednesday morning, renewing tensions to an ever higher level between the US and North Korea - this missile was said to have the range to strike anywhere in the US.
Dangerous times indeed...
Yet the rand held firm, despite negative news of foreign investors having dumped nearly R2bn worth of local bonds since the credit rating downgrade.
Fed chair Janet Yellen's testimony was due late in the day, which was eagerly awaited, but this only seemed to keep the rand on the front foot, despite five key matters facing the SA government amid the upcoming ANC vote - read Fin24's diagnosis here
Wednesday also meant it was time for our forecast update.
Per the chart below, the outlook was for some retracement higher into the 13.78-13.93 before we would then head lower again, to target 13.4371.
...Interesting indeed, with no real good news to back it up!
The market opened in the mid-R13.60s on Thursday, and while it was pretty choppy, the rand continued to hold its ground, despite the shocking news that foreign investors had sold over R7bn of local bonds during the week.
In other news: SA’s trade balance showed a R4.5bn surplus - and oil prices have increased slightly. Some positive news was that South Africans took home more pay in October this year.
The market touched as low as R13.57 before it began weakening again to over R13.70.
And then it was Friday - the last day of a crazy week.
Friday brought some political ‘bad’ news - somehow, Mpumalanga had got Zuma's ex-wife, Nkosazana Dlamini-Zuma, to be their nomination for ANC president. Just earlier in the week, the same had happened in the Free State. In both cases, something was certainly up, and it was clear the political tussle was far from over.
On Friday, some fascinating Bloomberg charts showed how the rand has fared post #JunkStatus.
First Up: Rand's carry return increase
But volatility is near the highest of 2017
Yet November was SA's best month of the year
Fascinating charts... and pieced together, they tell quite a story. While there are grave economic dangers in SA for locals and foreigners, many are prepared to take that risk.
On the last day of the week, the market weakened above R13.79 (entering our anticipated target area for a reversal) before retracing to end the day in the low R13.70s.
The rand was out the blocks on the first Monday of December – steadily strengthening against the dollar after opening above 13.80.
And this amid increased tensions on the Korean peninsula as the US and South Korea began a massive military drill - there is no easy way out of this one, and President Donald Trump needs all the wisdom to deal with this threat.
Amid all this, the local currency kept on the front foot all day and is continuing to do so after SA closed to reach 13.47, just a couple of cents from our projected target shown in Figure 2.
Of course, this has spurred economists to look for every reason for the rand’s sudden turnaround, with Cyril Ramaphosa ahead in the ANC leadership race and good GDP figures being the best choices. It is all very well to look in hindsight for reasons as to why the market has moved after the fact – when it is too late to do anything. That doesn’t help anyone!
But for those of us that were following the unfolding patterns of sentiment, there was the chance to make informed and educated decisions – and take preventative action, without bothering about the news, politics, or events.
With the rand having now hit its best level of R13.42, do not expect the balance of the week to be any less volatile – with Friday’s US Non-Farm Payrolls always a big mover.
But, while it is important to know of these possible triggers, that is all they are – triggers (such events and news are never direction givers.)
Far more important is to know where the mass sentiment is likely to drive the market - and that is what the Elliott Wave Principle does better than anything we know.
This past week is another testament to its uncanny ability to keep us on the winning side.
For more info on the rand, and to get weekly reviews and insights on its movements, go to Forex Forecasts.
• James Paynter is a professional financial market analyst.
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