Money markets: The good + the bad + the ugly = March 2017
What a month for the Rand! A month of shock news and shock moves - start off good, then going bad - and ending up turning ugly.
If ever there was a month to keep the market guessing, confused and taken by surprise, this was one of them - as the Rand first completely jinxed the market to reach levels seen two years ago, before turning on its heels and running for the door as Jacob Zuma entered the ring.
But let’s start with the GOOD (despite the BAD).
Going into March, the Rand was on the back foot after testing the 12.80 level, and as it weakened over the next couple of weeks, this was expected to continue, especially with all the bad news about:
- rumours of cabinet reshuffles;
- the SASSA crisis getting steadily worse; and
- the ridiculous furore over Helen Zille’s tweets.
Then on top of it all, an all-but-confirmed Fed rate hike was expected to be the final nail in the coffin to send the Rand spiralling.
In the days leading up to the announcement, the Rand seemed to be agreeing with mainstream expectations as it weakened to hit 13.36. Then, when the news hit (a confirmed hike - seen as negative for the Rand) - the market reacted … but in exactly the opposite way to expectations!
In just two hours, the Rand gained 30c and it didn’t stop there, but continued to push still lower over the next week.
This left the market at large completely bewildered and confused:
- how could this make sense?
- what had changed fundamentally?
- surely the Dollar should have strengthened?
Yes, fundamentally, it should have - but it didn’t.
That is because fundamentals determine the long term trend of a market - but the market can move counter to this for considerable lengths of time because it is not the main driver of the market by any means!
Let’s continue with the GOOD…
The Rand's crazy run had brought it to touch 12.31 on 27 March - levels not seen in nearly two years and levels that were thought impossible just a few of months back.
By this time, all Rand negativity had vaporized completely as sentiment had turned fully Rand-positive, with the ZAR powerhouse expected to continue its merry march, it seemed no amount of bad news could stop it.
However, our analysis was showing that the Rand had reached an extreme and was ripe for a reversal (as the chart shows below):
Not only against the Dollar, but the Euro and Pound as well.
It still amazes me how, time and again, it has happened over the past 10 years (probably for centuries)-
When a trend is nearing exhaustion point and a reversal is imminent
...there is often a significant event that triggers that reversal!
And who better to provide the trigger, but Jacob Zuma himself!
It is almost as if the man was caught up in the euphoria that no bad news whatever could affect the Rand, and he decided to put this to the ultimate test and call his two ‘best buddies’ (read ‘thorns in his side’) back from overseas to face the music!
Of course - the Rand reacted - big time – and this time, as expected.
By the end of the day, the Rand had lost 50 cents.
In no time, all the GOOD had gone BAD - and then turned really UGLY. How quickly things change!
BUT, this past month has given us some valuable lessons.
Firstly, news may be a trigger, but it has no effect whatever on the direction the market will take.
Because it is persons’ reactions to events - and the actions they take - that determines the direction the market will go. And this is based on how they are feeling at the time:
- if they are positive - they will discount negative news; and
- if they are negative, they will discount positive news.
For that matter, is a Fed rate hike good or bad news?
Well, it is both:
- it is good for savings and return on investment;
- but it is bad for the economy and business.
So, it depends from which perspective any news or event is viewed.
(Hmmm, can’t really ask the same question about Zuma’s decision, can we?)
Secondly, once sentiment has reached an extreme, there is no one left to turn from being Rand-negative to Rand-positive (or vice versa):
- and the market is primed for a reversal;
- all it needs is a trigger; and
- which Jacob Zuma has kindly provided - on more than one occasion!
Not the kind of trigger that we would have like to see mind you!
Thirdly, don’t be caught up in the sentiment - you need an objective picture as to where the market is likely to head - and when it is primed for a reversal, so you can take action - before it is too late to do so!
Some valuable lessons indeed.
Until next time.
For more info on the Rand and the way forward from here, go here: www.forexforecasts.co.za/go/RandReview
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