Risks abound for the Rand...where to next?

Another intriguing week of market activity has come and gone.

We live in very interesting days, where markets never do the same thing two days in a row...

...which comes with its own risks, as too many business owners with forex exposure know.

They know that it needs a clear head, and a emotion-free cool pair of hands to take the rudder when the markets are all over the place.

Not an easy thing to find...

But more on that later - to get back to the Rand for now, we saw a volatile week once again, although a little quieter than previous ones.

However, this is just the start (as you would have seen if you watched our webinar last month) and we have some road to ride yet in the Covid-19 path.

So let's start with a backward look first, and then take a peak into what this next week holds.

Over the course of the 5 days, here were the major talking points for the week as we saw the Rand duck & dive:

• Global reopening - the multi-trillion dollar question for every government across the world was when to reopen, as the risk of economic ruin by waiting too long or opening the gates too early was all too apparent...
• Stock Market recovery over? - we watched closely as the major US stocks took a downward turn during the course of the week - was this just a correction, or the start of a downtrend continuation?
• Covid-19 Wave 2 - and there was a warning of those very fears as China has reported new cases in Wuhan, after weeks of nothing
• Reserve Bank purchases - how much is SARB propping up the bond market is the question, as billions of ZAR was poured in this last month

The Rand actually began the week on the front foot, having taken a good 50c off the Dollar in later week trading before, and then opened Monday nearing R18.20/$ in early trade.

There has definitely been more optimism in global markets in the past couple of weeks...

...and this has been despite the ongoing pandemic.

How is this possible, you may ask?

Well, that is just the irrationality of humans - sentiment was incredibly negative some weeks back. So persons had to turn positive - only for the pendulum to swing again.

And that was just what we saw with the slew of economic news warning the risk of the lockdown continuing, as cases continued to rise regardless.

Over in the US (the global market indicator), here were some indicators of how things had changed:

• Jobless claims showed that 2.98 million applied for unemployment in last week. This brings the total lost jobs to 36 million in the past 8 weeks.
• Analysts are forecasting a further 2.5 million jobs having been lost in the last week.
• The US CPI fell the the second month running - and most since the Great Recession - a surefire warning of deflation (another thing we warned about in our webinar last month)
• Even with the stimulus checks, only around 80% of tenants made full or partial payments on their rent for May. This was up from April, but considering the amount of stimulus cash sent out, this is still a concerning statistic.
• Retail sales dropped 16.4% - the worst drop by far since records began in 1992.

And yet, we have seen the stock markets flying higher...

...why is this?

Well, this is a classic Elliott Wave - with a Wave 2 being a significant retracement back into Wave 1's gains/losses, before we flip back into Wave 3, the most destructive and deepest of waves in a 5 Wave move.

And what we saw from the stock markets this last week was warning signs of that, with the Dow Jones Index losing more than 6% at one stage in the week.

The fact is that the positivity has been irrational, considering the global pandemic - but that is going to likely end soon...

And then in other news:

• Over in China, the risks of a second wave of infections became very real as there were reports of a new batch of infections in Wuhan, threatening to have the city shut down for a second time. This prompted them to ramp up testing dramatically in an attempt to control a full blooded second wave outbreak. Other nations will be watching closely, as China is the leader in all of the cycles of the Covid-19 virus, and what happens there will more than likely follow in months to come in other countries.
• Locally, President Ramaphosa hinted to an eventual easing of SA’s current lockdown restrictions to level 3 by the month end - however, provinces with a high cluster of COVID19 infections would more than likely remain at level 4. It is a difficult game of cat and mouse, and walking the tightrope of "too soon" or "too late" has still has the same risks of falling off either side of the tightrope to economic ruin… At least one confusing and frustrating restriction was removed, as after adding items to your cart for 49 days, you can now proceed to checkout with ecommerce finally back up and running again.
• Over in the US, #QuantitativeEasing could start trending once again, as Fed Chair Jerome Powell flirted with the idea of injecting more money in to the US economy as they slowly start to reopen. There is also a new stimulus packaged of $3 trillion being tabled in congress, to provide more stimulus cheques and economic relief to Americans. It is a good time to remind everyone of what we said last month:
  Debt is the PROBLEM, NOT the solution.

  These economic packages may look attractive, but they are building the pack of cards higher.

• Locally, the stats started to come out as to how much SARB was propping up the Bond Market: in March, they purchased R1bn of bonds. In April, that was up to R11.4bn worth! The bank has also lowered interest rates by 200 basis points to support liquidity in the economy. They are really pulling out all the stops, and we will see what they come up with next as the next SA Interest Rate decision comes around.

There was so much more we didn't get a chance to cover… a swine fever outbreak in the Eastern Cape, Germany's economy going into recession with a 2.2% GDP loss in Q1, Saudi Arabia cutting oil production by another million barrels a day, South Africa's housing market taking a massive hit and much more.

But as for the Rand, we saw a choppy end to the week, finishing around R18.50/$ at the South African close...

Now, I realize that this Rand Review has not been particularly Rand-focused...

But we try to give you a complete overview of what is global and what is local - and this is where it changes as we take a look to the week ahead, as to where the Rand sits and where we see it going...

In terms of events, we have some big ones ahead of us:

• SA - Interest Rate Decision
• UK & EU - Consumer Price Index, ECB Interest & Deposit Rate Decision
• US - FOMC Minutes, Jobless Claims

But as we have already seen - the Rand will trade based on where sentiment drives it - and not where events will tend to move it.

So that is what we will continue to focus on - what the patterns are telling us as to what is mots likely to happen - before it actually happens...

...and we suggest you do the same.

To get a look at what charts we are looking at and using to give direction, use the link below to get access to the latest forecast. No charge. All yours for 14 days.

(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