Italian Crisis & Trade War dominate the Rand's week...

Yet another topsy-turvy week from the Rand...

...and who would have expected anything different with global instability seemingly ever increasing.

The EU has not been a stable place since Brexit first hit some years ago, and it seems to just be an endless rollercoaster of events in that area. This week: Italy.

It seems South Africa is not the only country who struggles with governments!

After almost 3 months since Italy's elections - and no government operating in the nation - everything came to a crisis point this last week...

...so let's see how everything played out amidst the Rand's bumpy ride, as the trade war also picked up steam once again!

Our forecast on Friday painted an 'iffy' position for the local currency, with a 70/30 probability spread, which meant that more than one probable wave count was unfolding...this one was going to need some close watching.

The expected trend was for a move downward toward 12.33-12.24, which was the more likely of the counts - but if we broke over R12.5831, then we would see a move back toward R12.7065...

...muddy waters, and close watching was needed.

Click to enlarge

Here are some of the top moments from the week to give you an overview of what we saw:

• Italian crisis - we go into this in more detail later, but the nation of Italy was effectively in limbo until Friday, making the entire region of Europe extremely unstable...
• Trade war restarts - just when it had all tied down, it was kickstarted all over again, but this time with even more countries involved
• Land Expropriation - things took a new turn of events this week, as the NEC concluded they were going to proceed WITHOUT amending the Constitution...
• Rand maintains junk - overall a 'positive' decision from Standard & Poor's latest ratings, as SA maintained a stable junk status rating.
• Fuel prices skyrocket - the value of oil has dropped from previous highs earlier in May, but still fuel prices continue to increase worldwide!

So, Rand in a precarious position to start the week...what's new?

The past few weeks have been nothing short of nerve-wracking for importers and exporters, as they try to manage their forex exposure in a volatile environment. Without an objective system, it feels like you are always being caught out, fighting the tide, battling with emotion, and missing out on opportunities.

This week was no different, as we saw wild swings of 30c in short timeframes.

This image gives us some idea of just how tough a week it was...

So, from our forecast on Friday we saw the Rand have a quiet start on Monday, giving some stability after a rough few days.

However...Tuesday was a different story, as we saw a more than 25c bounce in just a few hours...

...only for the sell-off over the next few days taking the Rand back as low as R12.45, after it had reached R12.73!

And of course, there were several high impact economic events to keep the volatility going:

• SA Producer Price Index
• Trade Balance (SA & US)
• US Job numbers
• US Interest Rate Decision in a couple of weeks

And what some said was fantastic news for the Rand, in S&P's decision to keep SA's Credit Rating unchanged, which would result in Rand gains, turned out to be of no assistance at all...

...which reminds us once again, that while economic events add to the overall volatility, we cannot look to them for logical guidance on where the markets are going to be heading.

But the big talking point for the week was the Italian crisis, as Europe was thrown into turmoil this last week.

In a nutshell, this is what happened:

• Italy's economy - the eurozone's third-largest - has been weak for years
• The eurozone's 2010-2011 debt crisis was patched up, but not solved
• The elections in March ended up with a hung parliament and there have been several attempts at coalitions and forming a government.
• It all came to a head last week when the President vetoed the nomination of "euro-exit supporter" Paolo Savona as Finance Minister.
• All this left financial markets in a state of anxiety, with global stock markets taking a plunge, the Dow falling almost 400 points on Tuesday. But the worst affected was the Euro, who took a real pounding as a result of the volatility.

Fortunately, just when it seemed everything was going to unravel, some consensus an agreement was reached and a new government was formed late last week.

So the crisis has been averted for now. But don't expect it to stay that way for long. Italy is no stranger to political turmoil, having now had 66 governments since World War Two!

Other newsworthy points from this last week:

• Land Expropriation without compensation continued to make headlines. This time, it was a drastic turn of events as the ANC & NEC concluded to "immediately use section 25 of the Constitution to press ahead with the expropriation of land in order to test the argument that the Constitution does permit expropriation of land without compensation."

  D-day for this Communist ideal of repossession of land is fast approaching, that is for sure...

• S&P's decision to keep SA's foreign rating as stable was seen as good news, with the agency upping its growth forecasts although it said that these remained tentative. They highlighted that post the political transition there have been key economic and social reforms pursued, but the challenges are still considerable.

  Once again, somehow, the fears of Land Expropriation did not seem to adversely affect their decision.

  General sentiment around the decision was that investor sentiment was still moving in the right direction, and that we would expect the credit rating to continue to hold stable for the time being...

  ...S&P also outlined what needs to be done in SA for the country to not just maintain its credit rating at a stable level, but to actually climb out of the 'junk' level which it is currently at...

• Fuel prices are still on the rise, and are heading higher by 82c per litre, as per the latest announcements from Dept of Energy...! The price of crude oil is still causing ripples worldwide.

The big news to close the week out came from Global economics on Thursday, as Trump announced that the US was imposing tariffs...

...but not just on China, but on some of the US's closest allies - Canada, Mexico and the European Union - a serious power move, but was it the right one?

It remains to be seen if that was a good idea, but one thing is for sure, and that is the the US economy is humming - on Friday the US Payrolls rose 223 000, about 50 000 over what was expected. This took unemployment to a record low of 3.8% - the best in 18 years!

As always, the Non-Farm Payrolls provided some volatility in the USDZAR market, as it bounced its way around to finish around mid 12.60s/$ on Friday...

So, here we are into June already - this year seems to be picking up speed every week!

The Rand has started off the week making some gains, but don't expect it to be one-way traffic. While there is not a whole lot happening this week on the economic event and data release front, nevertheless, we expect a bumpy ride ahead, and we will be watching some key level to confirm whether the preferred wave count will play out.

Sometimes the outlook is a tad foggy, but at these times more than ever you need to drive with a roadmap, which will keep you focused on key milestones and landmarks until the fog lifts.

So, if you have forex exposures, let us help you to make objective, educated and informed decisions - instead of irrational, emotionally-charged ones ... simply hit the link below to start your free trial.

Kind regards,

James Paynter