There are no major dangers on the EU economy in the horizon. The opposite is expected for 2018. This refers to the economic fundamentals as well as the political.
#EUR is in a general strengthening path. To what degree this will extend for the coming quarters is a matter of debate, but most analysts suggest that this will be the case. In any case even the pessimists suggest a "stagnation" and not a reversal in its current general trend.
To that it must be added that the path to normalization by ECB has begun albeit in small steps. This is expected to continue.
On the #USD front there is more or less the same picture. FED is expected to raise the rates next week. Many analysts believe that this major step towards normalization will be the first of two or even three rate hikes that could happen during 2018.
On the other hand of course there is some uncertainty after the change in FED's chair. On top of that is the unpredictability that comes with the Trump administration which could prefer a rather weak #USD. Lastly, political pressure by the administration into FED's decisions and strategies is something that the markets do not exclude.
Having said that there are no major dangers to the US economy for 2018.
The South African economy is expected by various sources to expand slightly and its GDP to rise slightly in comparison with that of 2017. But, there are three factors that could negatively influence this fragile projection.
One is commodity prices. There is no major surprises in precious metals expected during 2018. Platinum demand which is quite important for South Africa, is expected to remain at current levels. Gold price is a much more unpredictable factor. Gold is usually inversely correlated with #USD. Given the fact that #USD is expected to strengthen simply because of FED;s policy, gold is not expected to rise.
Coal and iron - ore are very different cases though. The consensus is that no major rise in price is probable. In fact it is very probable to see a considerable drop.
A second factor is political uncertainty. The nomination of the next ANC president will happen in the middle of this month. Mr Ramaphosa is seen as a reformist and his possible election as the next ANC leader and next South African President given ANC's dominance, will be seen with a positive eye by the markets.
The third issue is the credit ratings of the country's debt. Things on this front look pessimistic. If Moody's changes from review for downgrade to downgrade then local bonds will be expelled form the World Bond Index and this will have a significantly negative influence on the country's finances. The date to watch is next February when the next review will be published.
Given the above, both pairs should have been on a clear uptrend even with low momentum. But this is not the case (in the short term). The last weeks #ZAR has been surprisingly strong.
Various reasons may have led to this. Two that might be the most influential are the following:
The markets have gradually priced in a positive political outcome in the ANC presidential race is one.
The second is speculative behavior. While credit downgrades push institutional investors out of the country and hence applying pressure on the rand, they might draw in speculators. The latter see this as an opportunity since the rand is cheap and the yields are high.
Institutional research teams give the following outlook for the rand.
ING sees #USDZAR at around 14.5 by the end of 2018.This is a significant rise form its current levels. However they suggest that spikes in the price are very probable and that volatility will be relatively high.
Danske see the #USDZAR ranging at around 14 during the first 3 quarters of 2018 before dropping at 13.30 during Q4 2018.
Mathematical models based on statistics and historical data suggest a gradual (but not uniform, meaning it will have periods of range) drop of #USDZAR to 12.7.
The picture we get from a technical point of view concerning the trend is the following:
#EURZAR H4
#EURZAR Daily
#EURZAR Weekly
It can bee seen, as expected, that there is no break in trend in the Daily Chart, no significant change in the Weekly, and change in trend in H4 which photographs the strength of #ZAR witnessed the last days.
#USDZAR H4
#USDZAR Daily
#USDZAR Weekly
On #USDZAR there is no trend in Daily and Weekly charts, and on H4 the beginning of a possible trend reversal can be seen.
A rational way to interpret the above is as follows:
#ZAR will be affected by politics. In the short term, the ANC presidency and the likely election of Mr. Ramaphosa, could strengthen #ZAR even more. It will probably do that, since his possible win is not yest fully priced in by the markets. Some analysts suggest that if this event is fully priced in this could lead to a #USDZAR price of 12.50 or even 12 (and also have a similar effect on #EURZAR). This forecast has a great degree of speculation in it, but if it breaks 13 then momentum and market sentiment might kick in even harder and a further drop is certainly a possibility. Others suggest that a market positive ANC result will reflect to a price of 13.5. This sounds more reasonable. Let us not forget also that ANC nomination is after the FED decision. If as expected #USD is stronger by then, breaking the 13 barrier will be a lot harder.
In the long rum it remains to be seen if the new president is willing and capable to proceed with the necessary reforms and this will be priced in accordingly by the markets. This however will have a gradual effect on the price of these pairs. It will be a secondary factor, that will be added to the primary factors that will affect the pair during the next months.
The credit rating results outlook is negative. It is highly probable that Moody's will follow the other two and it will proceed with a downgrade. In theory this will apply pressure on the rand. It is not improbable though to see a repetition of the speculative scenario described above. It is highly unlikely though that this could strengthen the rand in a sustainable way.
#EUR is not probable to show any sustainable or considerable weakness.
#USD will get a push by the FED rate hike(s ?).
Given the state of the South African economy and the predictions for 2018 SARB is a lot more likely to cut rates than to increase them. The latter at the moment seems an impossibility.
Volatility and lots of ranging is the conclusion that can be drawn with relative safety.
In the long run though, it seems that until at least the beginning of the 3rd quarter #ZAR will be weaker in both pairs compared with its current levels.
Lastly, there is no fundamental justification to "jump of" the trends that are visible on the charts or "jump in" to trends that have not yet established.
So positioning for the medium to long term is at the moment long both for #EURZAR and for #USDZAR.
Update 14 December 2017
Positive political news during the last weeks, and "lazy" #USD (even after the rate increase) and #EUR have helped #ZAR.
This weekend's election is not yet priced in and could cause high volatility (in short term standards). Marginal win of either side could push #ZAR low, a decisive win could push it high or low depending on who wins. Prices above or close to 14 and close or lower than 13 are probable.
Despite the result of the elections, the outcome of the pair remains unchanged. For #ZAR to gain strength and start to rise in the long term a U turn in political rhetoric and in most importantly in the policies applied will be required. And this is not likely.
A negative result will be an opportunity to start building long positions. A positive result by no means will signal the building of sell positions.
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