Sentiment flips Rand-positive...but why & where next?

What a week for the Rand as we saw the market come roaring back against the Dollar, Euro and Pound...

It is no secret that 2020 has been a torrid year for the Rand ...

...but one thing you would know from following our articles is this - that when sentiment reaches an extreme, it can only turn one way.

This is demonstrated in our see-saw analogy video over here, which shows how market sentiment can only go so far before it has to pull back.

Well, that was what happened during this week...

A big reversal against the Dollar saw the Rand reach well below R18/$ for the first time since March...

...but what does the future hold? Is this a temporary blip before we test R20/$?

Read on...let us take a look at how things went and then how we seem them going from here.

As we look back at this last week, here were the big talking points from the 5 days:

• Interest Rate Cuts - yet another big cut from SARB saw the rate go even lower, as we waited to see what the next steps from the UK & USA would be...
• Vaccine optimism - with there being a possibility of a successful vaccine, there was said to be global optimism surrounding the end of the pandemic
• Lockdown relaxing - each country has their own take on how de-lockdown structuring would work, but is it too late already?

So, where we began the week was around R18.50, a far cry from where we ended a few days later.

But as we began the week, we had a host of risks still facing the Rand. Perhaps more than the week before, as the steadily worsening effect of the pandemic lockdown further crippled the economy.

So one would think that Rand bearish would be the only stance one could have...

...well, not so simple.

As already discussed, when sentiment reaches an extreme, we can expect it to turn.

This is because there is no one left to turn Rand bearish and push the market further. And then a few starting turning positive ... and then a few more as mass sentiment changes

This time, the trigger was optimism around initial testing of a vaccine - and therefore everyone attributed the risk-on sentiment that took place throughout the week to the simple fact that initial testing of a vaccine was good.

But, looking at the economy ... at the job losses ... at all the business closures ... bankrupticies ... and spiralling government, corporate and private debt....

One must ask, "How does this make sense?"

And that is it exactly. It doesn't make sense.

A vaccine cannot fix all of the above disasters. Not any of it, as a matter of fact. The damage has been done through the lockdowns anyway, not the pandemic itself, and actually all it has done is expose amount of economies that are built on the sand.

The fact is, this is just how the markets work.

Because they are driven by human sentiment - by irrational, emotionally-driven human beings ... and this happens time and time again!

So as we saw the week proceed - and emerging markets strengthen considerably - economists had to find SOMETHING to reconcile why this was happening...

Cue the vaccine story, and most persons just gobble it up as being the case.

Crazy, hey?

But those of you who are on the inside track as to how markets work, know full well that this was merely a trigger...and underlying sentiment was due to turn, based on the Near Term Outlook we issued last month.

And on Wednesday, we released our forecast with the Rand at R17.93, showing that we saw it falling further over the next few days to target 17.77 to 17.27... (see below - click to enlarge)

And that was just what we saw as the market strengthened further on Thursday to touch R17.51...

And then in other news:

• The other talking point which was said to have sent the Rand stronger (but this obviously didn't explain other emerging markets) was that SARB cut interest rates once again. This time it was another 50 basis points, taking the Repo rate to a record low of 3.75% - a more than 40% cut just during the course of this year! We have not seen repo rates this low in SA since the 1970s, which gives an idea of how badly SARB is wanting to stimulate the economy.

  Of course, this also does not make rational sense, as it means less incentive for investors to come into the bond and money markets.

  

• But as for wanting to stimulate the economy, they had good reason to worry, after mining and manufacturing both contracted during the month of February - this before the lockdown even began. Retail sales followed showing only a 2% year on year growth in February, showing the fact that there was muted demand even before the lockdown. This follows on what we discussed in our webinar last month as to the velocity of money decreasing for years now, and how that puts government in a sticky position trying to motivate spending.
• How to "De-lockdown" is the question for governments today, as we see South Africa's provinces now looking at moving to a Stage 3 level at the end of the month. Many other countries are looking at doing similar, but SA remains one of the strictest globally, as business continues to suffer. Has it already been left too late?
• Over in the US, the next jobless claims hit… another 2.44mil claims meant the total number was now at 39 million over the last 9 weeks. The likelihood of hitting over 20% unemployment in the USA is now very high, and we would be surprised to see anything less than that when the next figures come out. And the UK was in the same boat as their jobless claims spiralled to record levels in April
• The Fed continues to prop up the US economy with stimulus, such as their purchases of mortgage backed securities in recent weeks. They had never bought mortgage backed securities before 2008, and just take a look at this chart to see how that has changed since then:

So, why is the Fed buying so many mortgage-backed securities now?

Because this market is in trouble, and they are trying to prop it up.

We all know what happened to the housing market in 2008-2009 - and what we are heading towards is something worse than that. This is unlikely to end well for the Fed.

There is much more we could talk about from this last week…these are the sorts of topics we are going to cover in our upcoming newsletter launch.

Reply to this email if you are interested in getting access to that, as it will be critical to seeing what is coming in the next few years as we unwind from this pandemic.

As for the Rand...

We saw the market break 100c stronger to touch R17.51 in late afternoon trade on Thursday, before seeing a small retracement to end the week around R17.60.

So, has the sentiment turned?

Read on… it is time for the week ahead's outlook.

As we look to the week ahead, there are a slew of events over in the US as well as some local:

SA - Inflation Rate, PPI, Balance of Trade
US - Consumer Confidence, New Home Sales, Initial Jobless claims, GDP, Durable Goods Orders, Trade Balance
UK & EU - Consumer Price Index

We have something special for you this week, as we will be going live with Scott Picken of Wealth Migrate for a currency-focused webinar on Thursday this week.

This will not be one to miss as we look to the months and years ahead in this fast-changing world, to give our views on what we see coming for global currencies...

The link for the webinar follow in a email the next couple of days, so stay tuned for that...

As for the Rand, we expecting a ding-dong battle this week, with some potential for a bit of early Rand weakness.

We have some key levels we will be watching..

...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