Rand turns the tables on the majors

Well, what do we learn time and time again with currency markets?

When things are getting to an extreme, and there is panic setting in, with the overall feeling being that the current trend is going to just keep going...

...and economists are naming anything and everything to justify these moves

...and it seems we are on an unstoppable rollercoaster

...THEN, you know it is time for a change in sentiment, and a change in market direction.

At first, it will be a cautious and careful change, then it will gain momentum, and eventually will reach another extreme. And repeat the cycle once again.

What we saw this past week was such an extreme being reached, with the likes of Bloomberg painting a gloom and doom picture for the Rand in their Monday article entitled South African Rand Is Back to Its Bad Old Way.

But instead of the Rand reacting as one would rationally expect, it punched to a new high for 2018 - and then reversed sharply, strengthening 50c in 3 days!

It was quite a week - do join us for the review of it...

On Friday, we provided an updated outlook with the Rand having broken higher, and it was trading at 12.77 at the time of the forecast. The expected target area was 12.93, before a topping out, and then Rand strength to be expected.

It was going to be yet another interesting, and likely volatile, week of Rand action...

Click to enlarge

Without even taking the Rand into consideration, it was a week packed with events, once again - such as some of the following key moments:

• North Korea meeting - it all fell flat on Thursday, as hopes of peace in relation to North Korea faded...and then seemed to resurrect?
• Interest rates - SARB's decision on interest rates is one of the most important events we have every few months, and Wednesday was the big day
• Trade War - Trump appears to have played out the feared Trade War with China in true businessman style, and tensions are definitely now releasing on this front as they debate how to work together
• S&P Credit Ratings - (junk status) yes, once again, it was that time of year...

Well, where to start?

With a week promising action and volatility, the Rand certainly didn't disappoint.

May has been a rollercoaster, with volatile conditions giving importers and exporters a tough time managing their exposures.

And this week was no different, as the snapshot below shows - a 50 cent move in just a few days!

On Monday, the Rand was right into the thick of it as we saw it weakening even further, breaking to new highs (or lows in terms of strength, but highs in terms of price) in 2018, as it touched over R12.89, before hitting strong resistance, and reversing sharply.

(This was just a few cents below our idealized target from Friday, and the sharp reversal below invalidation levels meant a change in wave count...

...a reminder once again that the Elliott Wave Principle is not a perfect science, but it is still the best forecasting tool that we know of to help manage your forex exposures).

By Wednesday, the market had already retraced almost 40c!

Why was there such a turnaround? Especially with the Dollar itself being so strong?

Economists went wild with assumptions and ideas as to why this was happening, looking for all sorts of reasons to justify the movement.

However, anyone who tries to tell you that, based on this economic event, or that political expectation, the market will head in a certain direction, is unfortunately going to disappoint you time and again!

Because, unfortunately, that is not how the markets work -

• The markets do not move how we would expect them to.
• The markets do not move rationally or in line with fundamentals.
• But they DO move in trends and counter-trend cycles in varying degrees.
• These are cycles of mass human sentiment, which drive the market from one extreme to the other.
• And we CAN analyse these cycles, to give the most probable outcomes over the next few days, weeks, months and years.
• But, just like a weather forecast, these do not always work out 100% as expected, but they are certainly a lot more helpful than relying on gut feel, news, events and economists' hypotheses...

Now, to give you some overviews of other newsworthy events from the week:

• The US dollar was a force to be reckoned with, with bets that the US Federal Reserve will raise interest rates in June sending the dollar punching higher - at least, that is what the economists said...
• With trade tensions between the US and China easing, the US dollar strengthened and US yields rose. It seemed that Trump and President Yi were beginning to form a better relationship in terms of trade, with each having their 'trade-offs' to make sure the deal worked for both parties. Overall, it seemed the US was getting a very favorable deal thus far, but with enough in it for China to make it worthwhile.
• South African fundamentals are looking flaky. Some of the economic data which came out in the last few weeks did not make pretty reading:

South African Manufacturing Production

South African Mining Production

South African Business Confidence

• Turkey's central bank hiked interest rates by 300 basis points on Wednesday. The bank took decisive action to put a floor under the cratering lira currency and win back investor confidence shaken by interventions from President Tayyip Erdogan. A drastic action, but what will come out of it...?
• Trump & North Korea's relations had reached an all time high just a few days back...and then it all fell apart on Thursday. North Korea published a rathe aggressive statement labeling Vice President Pence a "political dummy" and that his remarks were "ignorant and stupid".
• President Trump took the high ground, and announced he would NOT be attending the summit in Singapore...and we are back to the deadlock again...yet on Friday, the summit seemed to be back on - a bit of a political chess game on the go...
• SARB had the big decision of interest rates this week, and despite expectations by some that there could be an increase, they were held stable for now, with no change being made
• And lastly, S&P's credit ratings were due at the end of the week - which only came in after the week's close with the decision coming out with South Africa's sovereign credit rating of junk status kept unchanged

Overall, another week of classic Rand volatility, and global news & action to match.

But the Rand came out victorious, trading around R12.50 by the close of the week - what a turnaround!

Monday has dawned with the Rand below R12.50 to the Dollar and looking like it could strengthen further.

However, it may not be one-way traffic. We are watching some key levels to confirm our wave counts, and the next few days will be critical to direction.

Coupled with that, we have several medium-to-high impact event triggers this week, including a biggie - US Non Farm Payrolls - so expect some volatility for the coming days.

So how do we keep level-headed in such times, when profit margins are fluctuating so wildly?

Simply by keeping focused on what the sentiment patterns are telling us, which will give you the best view of what to expect for the next few days, weeks and months ahead... and beyond. And using these to make rational and strategic forex decisions.

So, once again, we suggest you join us as we see the market unfold...

Or, of course, you can trust the traditional economist outlook, the old 'gut feel' and the blind panic decisions that I am sure have served you so well - and so often - in the past...(or maybe not?)

The choice is yours...

Kind regards,

James Paynter