ZAR – Buy the Rumor Sell the Fact?

Anyone who has been following the ZAR will know that the USDZAR currency pair is one of the most volatile pairs around. The South African currency has long been a catalyst of Emerging Market risk along with counterparts such as the MEX and the TRY.

However, it is not often that global risk sentiment coincides with crytical structural reforms within the country.

Looking at the graph below it is evident that the ZAR has experienced an unprecedented recovery against the Greenback. Though for the most part this coincided with USD’s global retreit against most other currency pairs, the ZAR’s movement was exaggerated by a monumental changing of the guard of the leading party (the African National Congress).

The chart below clearly shows how the ZAR steamrolled ahead on positive expectation that Mr Cyril Ramaphosa will be elected as new president of the Republic of South Africa.

The currency’s appreciation of +/- 18% took many by surprise as very little consolidation has taken place in this pair, since mid November.

SHALL I STAY OR SHALL I GO NOW

The next bone of contention within the ruling party was the fact that outgoing president Jacob Zuma, refuses to bow to internal party pressure and give up his seat. It is not uncommon for an outgoing president to vacate his post around about a year before the new guy takes over, this way allowing for the party to get used to their new leader.

With elections only scheduled for mid 2019, many are wondering why the major urge to get a man removed from his post who was most likely going to do so within a month or two?

GLOBAL MARKETS TANKING?

Over the past few weeks, the ZAR has been moving far more on own internal dynamics that that of the market. This is evident in the fact that despite global sell off in equities, with every man and his dog screaming doomsday prophesies, the USDZAR pair remained below 12.00 — a massive feat considering that under normal conditions the knee-jerk reaction of the Rand would have been to scream higher like a bat out of hell.

This makes us sit up and look closer at internal dynamics.

What is happening currently? Could this be a textbook case of one of Wall Street’s most favorite anecdotes?

BUY THE RUMOR SELL THE FACT

Since this past weekend, all political figures are on knive’s edge, waiting to hear what Zuma decides to do. He was given a political ultimatum which is expected to draw to a close this week.

He was given the choice to either resign voluntarily and leave quietly, or face an impeachment charge, the latter would revoke all his power and protection given to ex-presidents of a country.

WHAT WILL HAPPEN TO THE ZAR?

The question remains, how much is the sentiment worth of a President like Zuma exiting his post to be replaced by Mr Ramaphosa. Will the country miracoulously improve its economic conditions by the shear fact of this shift alone? Will the downgrading by the rating agencies be reversed? Will the unemployment ease, will GDP growth sky rocket?

Logic says no. Even though the road ahead might look rosier than before, the economic reality is that it would take some time.

As such, the positive sentiment in the ZAR could ease and one could see a correction to a more “comfortable” trading range somewhere north of 12 handle.

Analyzing the most likely risk one would prepare for the ZAR to lose some value as it has been flirting with the resistance placed by the down trend line for a few days now. A confirmed break of this trend line (currently around 11.98) will have some severe upward pressure in the ZAR and experts predict the currency could drop to around 12.50’s

Technical Level to Watch

Closer to current levels I would say that the 12.0560 level is the one to watch.

The chart below shows that on the most recent move lower, this level was the very first level on indecisiveness. With the open and close ending up neutral, the very next day saw a massive spike to the upside, only to close the day below the day before. This set the stage for a push lower.

What is very interesting to note that the ADX line, also turned, which from a pure technical standpoint indicates the strength of the trend has tapered off.

MAJOR RESISTANCE

This 12.0560 has now become the first major significance residence level, the significance of which can be seen below.

First close below this level lead to the next bar testing it as a high and failing, followed by a massive move lower.

A few days later it was tested once again, only to fail again. A further test closed above this level, but interestingly enough the very next day gapped lower on open, back below this residence line. With no significant follow through on any of the subsequent tests, (coinciding with the news of Zuma’s possible resignation) kept the ZAR to the 11.90’s level for now.

CONCLUSION

A confirmed break of the 12.0560, will make room for sizable upside movement and then the call for 12.50 does not look so unreasonable. One could argue that even with the best of news, the appreciation potential for the ZAR from these levels could run out of steam around the 55-day low (11.7950), as don’t forget – South Africa is a net importer of product, so the natural tendency would be for the major corporates and real money to start filling their boots below this level.