This article was first featured on Fin24.com - you can read it over here - they felt it was so informative, they had to share it with their audience. I hope you feel the same way.
Read on for the full article...
The Rand: Looking for Reasons Why...or Simply Looking Ahead?
The Rand has sure left its volatile best for last, as the past six weeks have seen the local currency make gains not seen for some 18 months.
Of course, this has been attributed to the “Cyril Ramaphosa effect” as economists claimed initially that investors were betting on him winning the ANC presidential race.
And then when he managed to pip Dlamini-Zuma to the post (after a close contest and a tense recount), the Rand’s 4% gain to push below 12.60 was attributed to his victory nomination…
A very plausible story, right?
Except for two small facts….
One being that the race was too tight to call, even for those on the inside track - so how could anyone on the outside be betting on his winning?
And the second being that the Rand actually strengthened by over 4% before Ramaphosa was announced the winner.
In fact, it hit its best level of 12.5141 about 3 minutes before the results were announced...
...then subsequently weakened by 27 cents over the next couple of hours, as the below chart clearly shows!
Click to enlargeFigure 1. Dollar/Rand 4Q2017 Movements and Events
If anything, the headlines should have read exactly the opposite, such as “Rand loses 2% as Ramaphosa wins”...but why spoil a good story for the sake of a few facts, right?
This is pretty much a classic example of hindsight economist talk - always looking for reasons (after the fact) as to why the the markets have moved…
...and coming up with what they believe is the most rational of answers - even if they don’t quite fit into the actual facts!
The sad thing is that persons actually believe this “currency fake news” over and over again - because it sounds plausible and rational.
But worse, they then make financial decisions based on how these ‘experts’ think future events are likely to affect the market’s direction.
Which, more often than not, is exactly the opposite of what actually happens!
The result: Bad decisions and lost opportunities (with all the anger, anguish and frustration that goes with it).
Quite honestly, when such ‘experts’ cannot even put together a story (as to why the market has moved) that cannot stand scrutiny, why would you take any cue from them to give any idea of how future events are likely to move the market in future?
The fact is, unfortunately, that our human minds like to have some rational, logical argument for the market’s moves.
BUT...that is not how the market moves.
The Rand is NOT - and has never have been - moved by events!
And the Rand’s movements are anything but rational or logical.
The market is moved by human beings making emotionally-charged - and often totally irrational - decisions ... which are based largely on our level of optimism (complacency and greed) or pessimism (fear and anxiety) at the time.
Human Emotion. This is what moves the markets. Not events!
And because we tend to react the same way in similar circumstances, these patterns of human emotion recur. Over and over again.
And hence, there is some predictability to this irrational human behaviour...
...which allows us to predict future market movements, based on how past patterns of emotion have unfolded (much like weather patterns)
This is in essence the Elliott Wave Principle - the discovery of the laws that govern human behaviour in financial markets.
And once you understand this, you will forget about looking at what events have caused the Rand’s move...or how future events will impact the Rand’s direction - and instead simply focus on where current market sentiment patterns are telling us where the market is likely to head.
And that’s exactly what we did prior to the 3 big events highlighted in the chart of the Rand history, the first being Zuma’s surprise #CabinetReshuffle on 17 October ....
Three weeks prior to this, on 20 September (with the Rand at 13.32), we had updated our outlook for the next few weeks, predicting a move up above 14.11.
We had no idea what triggers would send it there - all we knew was that the sentiment patterns were calling for a move higher.
Click to enlargeFigure 2. USDZAR Near Term Forecast - 20 Sep 2017
And...in line with the forecast, the Rand duly pushed higher in zigzag fashion over the next few weeks, with Zuma’s surprise decision being just the trigger that the market was looking for to push it into our target area.
And then, on 10 November 2017, when the Rand had hit 14.37, our analysis indicated the market was expected to top out and fall sharply below 13.90…
Click to enlargeFigure 3. USDZAR Near Term Forecast - 10 Nov 2017
And what happened?
It topped the next trading day...and dropped sharply below 13.90 over the next couple of weeks as anticipated.
And finally, on 22 November 2017, just 2 days before the ratings agency were expected to announce their decisions, we updated this outlook, keeping our eyes focused exclusively on what the sentiment patterns were telling us…
(and with a downgrade almost a given, everyone we know was predicting the Rand would take pounding in the weeks ahead).
But our analysis painted a very different picture, as shown in Figure 4 below.
This showed that the Rand, which was at 13.82 at that stage, was likely to head sharply stronger against the Dollar over the coming weeks to target the 13.32 to 12.97 area, with an imminent bounce off support first.
Click to enlargeFigure 4. USDZAR Near Term Forecast - 22 Nov 2017
Very much a contrarian view.
But, as can be seen from Figure 1, that’s almost exactly how the market played out, with the Rand initially weakening to 14.15 in anticipation of #JunkStatus announcement, and then reversing sharply on the news...against all mainstream expectations!
And then, in line with our forecast, it continued to gain steadily against the Dollar the next four weeks to hit the expected minimum target area of 13.32 to 12.97…
... right in the middle of the ANC elections!
Fascinating stuff (I must confess, this model’s ability to predict still amazes me).
But this is a classic example of how looking at the right information (market patterns of sentiment) - and ignoring news and events - can give you clarity and improve your decision-making ability.
So, have you been hurt by unexpected moves to date?
If so, perhaps it is time to stop looking for reasons why the market has moved - after the fact (when it is too late to take advantage - or avoid the damage)?
And instead…
Start looking ahead to where sentiment is likely to move the market - irrespective of events (allowing you to make objective decisions and take action at the right time)?
To your success~
James Paynter (Dynamic Outcomes)
Founder/Head Analyst
