I believe it is important to take a look back the past few months in order to get some clarity and perspective as to the foreign exchange markets and the Rand in particular.
With volatility in the year of 2016 remaining at high levels (after a torrid year last year), people are still very much caught up in emotions, events and happenings, rather than following a strategy with respect to their exchanges.
At the beginning of the year, all was doom and gloom for the Rand, having just hit record highs (lows) against major currencies, and if you read any opinions or outlooks from 'experts' around that time, their outlook was anything but positive.
Mail & Guardian's article 'Analysis: Why the rand is falling' on 18 January 2016 summed this up with their forecast for the year:
"The rand is expected to remain under pressure with many analysts predicting that it will fall further in 2016."
By contrast, our long term prediction published the next day (19 January 2016) said the following:
"The market...has either topped out at 17.8187 or is one last thrust from doing so...Once complete, it is expected to retrace down into the 14.00 to 11.25 area"
Very different outlooks...
Since then, we have had some calamitous events:
- After-effects of Nenegate, boiling into Zuptagate
- Pravin Gordhan's war with the Hawks
- Nkandla #PayBackTheMoney coming to a head
- Moody's and S&P's downgrade new misses
- Turkey's coup d'etat...and numerous terrorist attacks
- Widespread social unrest boiling over
- Poor economic conditions
- And then of course...Brexit
If you had been told that the South Africa would suffer all of the previously mentioned calamities (as well as a whole lot more that were not mentioned), which of the above forecasts would you have gone with?
Would you really have believed that the Rand would be testing R13.20/$ by Mid August?
...I think not.
Clearly, from the above, we cannot look to economic, social and political events (or to mainstream economists and analysts who are just doing the same) to give us a clue of future market direction.
And that brings us to the latest reason given by pundits for the Rand's move:
Local Elections Give Rand a Boost! |
The news is full of it - how the Rand has been given a boost due to the optimism coming out of the peaceful municipal elections and the gains by the opposition.
Once again, this sounds rational, but is this really how the markets work? Does good news always bring a stronger Rand, and bad news a weaker Rand?
No, it doesn't.
The fact is the markets are anything but rational. Period.
For instance, if we look at Moody's decision on 3 June 2016 to keep the credit rating unchanged for South Africa (very positive news), surely the Rand would have strengthened, right?
Well, instead, it weakened 60-70c the following week!
Rational? Logical?
Anything but...
The fact is that mass sentiment (irrational, emotional human beings) is what drives the market - not events - and this sentiment will take the market in a direction irrespective of events until it reaches a point of extreme, and then reverses.
This phenomenon is what the Elliott Wave Principle is all about - analyzing these patterns of sentiment over different time frames to get a context for where the market is at present - and giving the following critical pieces of advice:
- In which direction is the current trend?
- How far is the current trend likely to extend?
- At which point is it favourable to get in/get out?
- At which point is my assumption wrong?
To illustrate, if we take a look at our Elliott Wave forecast of 1 August (2 days before the elections), with the Rand at 13.8682, you will see that a move down into the sub 13.20 area was expected in the next few weeks.
Click to enlargeJust 9 days later on the 10th of August, the Rand touched R13.19/$.
So...did the elections cause this or not...?
I don't know, and neither do I actually care.
All that matters to me is that the Elliott waves were predicting which way sentiment would likely drive the Rand, irrespective of upcoming events.
And with that, the the following valuable information:
- The current trend (down)
- How far it was likely to extend (below 13.20)
- The point it was favourable to get in or out (exporters:- almost immediately, importers:- wait to 13.20)
- The point where this assumption was likely wrong (14.1176)
I have already spoken about our long term outlook in January forecasting a move below 14.00.
Let's give you another example.
Here is our Medium term forecast (outlook for the next few months) issued on the 1st of February 2016 (see below - click to enlarge).
What we have seen since that date (when the Rand was at R15.8657/$) is a steady strengthening of the Rand, despite the occasional blip, all way down below the initial 14.55 level....
...to current levels, having all but tested the 13.16/01 support level shown in the above chart.
And between these dates, we have had the earth-moving events and shake-ups listed above, some having a big immediate reaction by the market (Brexit taking the Movers & Shakers crown by a long chalk!)
And the answer to that is an emphatic NO!
Despite all volatility, and despite all emotionally charged, irrational decisions, the trend has not changed. Economic events only affect short term price, and have no long lasting effect. Period.
And this is why I have learnt over the years not to listen to speculative economists and to instead trust the Elliott Wave Principle to give me a peek into the future.
And if I can trust it, then surely you would be prepared to at least give it a try?
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As always, I would love to hear your comments and feedback - please leave a comment below.
To your success~
James Paynter
