Rand Volatile as Global Tensions Spike Even Higher

Another fascinating week of Rand markets saw us testing pre-pandemic levels once again, as the Dollar capitulation continued.

In a week which defied all expectations, we saw the Rand fighting off the bad news - but mostly through the Dollar's weakness...

...proving once again that fundamentals don't just move the market.

Only for the Rand to hand it all back again at the end of the week!

The markets are an ever-changing game.

Let's get into a full review to see how it all played out...

Here were the biggest talking points of the week:

• State-owned entity woes - SABC, SAA and Eskom are leaving the South African economy like running into a headwind with a parachute on your back...what are the answers?
• US/China tensions - the game of tit-for-tat is ratcheting up fast, and right now the Trade War is way down the list of talking points...
• IMF Loan - the much anticipated discussion around SA's loan will take place in the coming few days
• EU Stimulus Package - the EU jumped on the debt-wagon with a huge stimulus package due to be implemented...what will the debt-laden world look like the other side of the pandemic?

Where to start is the question for this Rand Review, as we have so much to talk about...

First things first - the Rand opened around R16.67 to the Dollar. It has been amazing few weeks from the local market, gaining significantly against the Dollar, despite nothing substantial to underpin why it was happening. Much of it has just been Dollar weakness, but also just an unwinding of VERY negative sentiment from the peak at R19.34 a few months back...

This was proved again this week, as every bit of bad news that could have come out for SA's state-owned entities, seemed to hit all at once:

• SAA was on the ropes as we all know, but it seemed as things were getting worse time running, with an agreement needing to be reached when it came to funding for the business rescue, otherwise the business rescue plan would be deemed unimplementable. Mboweni announced that he had not authorised state funds to bail out SAA, but may approach pension funds. This kind of talk is just sending shivers down most South African backs...who would want to invest in black-hole SAA right now?
• To join the party, SABC held a two day briefing on the failing group and its horrific debt problem. As News24 stated, the problems seem current but the rot started more than a decade ago. It now leaves the position of the broadcasting network as precarious to say the least...where to from here?
• And then just when we thought Eskom was on the upward track with their highest production all year, they announced the grid to be under "severe pressure" on Wednesday, and some areas would be implementing load rotation, or localised rolling blackouts. So if max production is not enough, then what is?

Yet, despite all of this news, we had the Rand strengthening through the first half of the week?

The answer as to why? Dollar weakness:

By Wednesday, the Rand was testing it's strongest level since the pandemic began back in March, as persons were left dumbfounded by it seeming to ignore local news.

The markets continue to amaze...after a while, you learn to not be surprised anymore, and rather to trust wave counts which are not affected by our emotions.

Our wave count on Tuesday showed that we were due for a bottoming out, likely above R16.3204... (see below - click to enlarge)

With the Rand coming close to that R16.32 level, things were quite tight...the next few days were always going to be interesting.

And then in other news:

• US and China tensions have continued to ratchet up, with the trade war now far from the biggest talking point. The US has ordered China to close and evacuate Houston consulate within 72 hours. Hours after the announcement, they were seen burning papers in open metal barrels and refusing entry to the police and firefighters when they arrived to fight the fire. China vowed to retaliate, calling the action illegal. This was followed by the FBI announcing that they know China is holding a Chinese scientist who committed visa fraud inside the San Francisco Chinese consulate. This follows the already heated sanctions discussions for Chinese Communist members, and US actions toward Hong Kong after the new security law was passed. This is far from the last of flaring tensions between the two giants…
• Over in the EU, a massive $857bn package was passed as stimulus to fight the effects of the ongoing pandemic. The EU has always been lax to incur more debt with so many debt problems already existing, but the extent of the damage has left them with no choice. More details on the package over here
• Locally, SA is waiting with baited breath for news from the IMF executive board who are due to discuss South Africa's loan request during this course of this week. It may well be a good thing to reign in corrupt politicians should there be terms and conditions if the loan is approved, as it may mean many are forced to play open cards. And so we wait to see what they say…

And that took us as far as Thursday where we had the SARB interest rate decision. Expectation was for another 0.25% rate cut to be confirmed with record low inflation figures and the current economic situation being the main drivers. In anticipation of the decision, we saw the Rand lose as much as 35c to test R16.70:

...only for the decision to come out as expected with a 0.25% cut - and send the market tumbling back down to test R16.50! All too quickly though, we were back to testing R16.70 the same evening!

The Rand was back to its illogical, volatile best.

Over in the US, debates around the next stimulus package took place as jobless claims just refused to lie down - another 1.4 million claims showing no progress in business reopening, and perhaps even contraction.

Analysts are expecting a GDP contraction of around 35% for Q2 when figures are released next week...so standby for that.

Friday saw more Rand weakness as the market tested upwards over R16.80 - what a week it had been!

All telegraphed exactly by our forecast last week Wednesday...

As we look to the week ahead, we have a number of important events coming up over the next few days:

• SA - Balance of Trade
• USA - Durable Goods Orders, Trade Balance, Fed Monetary Statement, Interest Rate Decision, Jobless claims, GDP data
• EU - Consumer Price Index

Some of the more interesting ones are certainly going to be the Interest Rate Decision from the US, as well as jobless claims and GDP data.

These are key components to the ongoing stimulus debates in the US.

And not to forget the US and China tensions as emotions are running high...

...and that is before we even get to local events like IMF considering the SA loan.

So, with all these events, where will this leave the Rand?

What it melts down to is mass human sentiment - emotional decisions triggered by the above events - and sometimes by no events, but reaction to market movement itself.

The balance of all the emotions of all the persons involved in the Rand market will dictate where the market is headed...

...and those same emotions are your worst enemy.

When the market is highly volatile, it is extremely difficult to make rational and educated decisions that often mean doing the opposite of what your emotions are telling you.

And that is why we rely on our Elliott Wave based forecasting system to give us a scientific-based objective view of where the market is likely headed in time and price.

Based on the current analysis and forecast, we expect a few surprises (for the unprepared) the next week or two and again, we will be closely watching some key levels to confirm or invalidate our preferred outlook.

(You don't want to regret not having done so this time next week...)

Look forward to hearing from you.

To your success~

James Paynter