USD/ZAR Trade Insight

[Guest KirbyIG]

USD/ZAR

 

Analysts are split 50/50 on whether we are going to get a downgrade from ratings agencies on Friday, and with it generally occurring after market we could be waking up on Monday morning with a very ugly hangover. The Rand has strengthened against the Dollar, coming back to test support around 13.95 and whilst we have made a lower high over the last week, the pair is trading in a bullish (for the USD) upward channel and the current price action would still be considered a bullish consolidation with an upside target for buyers of the Dollar around 14.24 and 14.48 in extension. 13.80 could be considered as a stop loss for those favouring the upside move, as we see a confluence of rising and horizontal support in place.

 

Caution trading around news events as this can lead to increased volatility and gaps in price.

 

Courtesy of Leigh Riley

Premium Client Manager

 

Share your thoughts on the above, what could be the impact of a downgrade from the rating agencies and what is the likely impact on ZAR?

[ChrisRobUK]

Hi AndaT,

 

Interesting view and indeed the Rand has strengthened recently. The muddied waters here are, as always, due to a lack of full understanding and insights into what has driven the Rand's performance recently as the macro economic trend has not altered significantly.

It has been traded largely around news and political events recently.

 

For myself, the above is what led me to take my position in the market; I viewed the macro trend as unchanged.

It's still speculative as to whether or not the debt gets downgraded now or later (as evidenced by the polls), but you take a risk either way.

 

The technical analysis, in this instance, is rather irrelevant, as is volatility. It's a binary outcome, they either get downgraded or they don't. So you either win x% or lose y% within the hour after the announcement.

Lastly, have you considered all crosses? I'd like to point out that the relative strengths of GBP, USD, and EUR against ZAR are not exactly congruent, so you may have greater moves for or against depedent upon your base currency.

[ChrisRobUK]

Sorry I realised I never answered your actual query on the impact.

If they lose two of the three agencies they are dropped from the government bond index, meaning pension funds and similar prudentially based investment fund managers need to dispose of their investment. This will lead to an outflow and Rand weakness (I've seen Biznews quote anything from $7bn to $14bn. Needless to say, in the region of R100bn leaving the country within a month would be detrimental to the Rand). Plus there's the carry trade and those borrowing USD/EUR/GBP to invest in Rand for yield optimisation; they may be hedged, or also sibject to mandate restrictions - again I think Rand weakness to follow would make sense.

 

Lastly, the increased credit spreads and interest rate effect would increase the cost of borrowing and capital costs. However SA is still in stagflation territory so real GDP growth is an issue; especially in an environment tipped for increased taxation.

 

These are all my thoughts and by no means advice, just worth considering the second order effects of the downgrade itself. I think it could still go either way.

 

Anyone else's thoughts?

[smurison01]

Hi Chris

 

Some great insights there. I believe you are right in terms of outcome being binary, although my point of view is that if not on Friday, then after ANC conference (end 20 Dec) the downgrade will come. So i believe SA bond and CDS markets have priced or partly priced  in this occurrence, although on the actual event date we probably end up with sharp knee **** reaction with the ultimate result being further weakness in ZAR and some forced basket selling as we get dropped from Citi World Bond index. 

 

In terms of the technicals, i think the relevance thereof is how you use them. Good technicals for me reflect the underlying fundamentals /economics and are not the actual cause of any directional movement. The price is the sum of all external forces and to me they currently support the view of continued weakening of the rand against the dollar. Obviously the catalysts are not just domestic (SA specific) but probably more geared to external catalysts and US monetary tightening theme. Against the EUR we have the tapering theme and the GBP we have the brexit theme but to me the trends to me currently favour strength against a weakening ZAR.