ZAR FOREX REPORT - 15 July 2014 INTEREST RATE ANNOUNCEMENT THURSDAY The primary focus this week is on the SARB Interest Rate Decision on Thursday just after 3pm South African time. Interest rates are currently at 5.5% with the overwhelming expectation that these rates will be kept on hold. With that being said, there are some economists out there who are expecting a 25-50 basis point (0.25%-0.5%) interest rate hike. This potentially sets up a big move later this week IF interest rates are increased by 50 basis points as the majority of the market is positioned for no interest rate hike. The reality is that SARB are always way behind the curve when reacting to inflationary and economic pressures and currently it is no different. They are reactionary as opposed to anticipatory in their approach to managing the economy. We all know that actual inflation is not at 6%. Try 26%. Surely if inflation was 6% then people wouldn’t be striking for 20% increases? People strike because they can no longer afford to put food on the table and they are desperate. SARB are living in a warped sense of reality. Some define that as ‘insanity’ by the way. The challenge here for SARB is the following: The only policy vehicle available to SARB is ‘interest rates’ (ie. raise or decrease interest rates to control and manage the economy) The inflationary reality is somewhere between 20% and 30% SARB need to be increasing interest rates to control inflation But by increasing interest rates they will similarly slow economic growth and GDP So strikers are striking because life in SA is expensive, SARB should be raising interest rates to control this inflationary environment but can’t because by raising interest rates they will similarly depress an already stagnant economy. This is a lose – lose situation for SARB I’m afraid and at the moment they are acting like a deer in the headlights. Just keep telling everyone in SA that inflation is still at 6% while we think of a plan. The walls are closing in though and SA is becoming a very interesting place both economically and politically as I believe we enter a crossroads for the country. We are no longer riding the bull nor the darling of emerging markets nor the example of political stability. Some tough decisions have to be made on all fronts going forward and many of these similarly reflect the same challenges as a simple interest rate decision. Anyway, I have included only one chart below showing that the markets have been flat to boring the past month with USDZAR trading within a tight 10.60 – 10.80 (2%) band. Volatility is non-existent but we may see some movement later this week depending on the interest rate announcement. Keep in mind that we know longer term ‘real money’ players are currently around the low 10.50’s. The fact that the market has been steady between 10.60 and 10.77 the past few weeks suggest (1) that these long term players have not moved their price (pretty obvious statement but key to mention it as we are looking to see these real money players come into the market at higher levels at some point), (2) the fact that these long term players have not started buying at higher levels means that they theoretically should still be there in the low 10.50’s providing strong support (which if it gets broken would be a key technical indicator of a trend reversal). Our key approach is to know and understand where these ‘real money’ players are and to be positioned with them in the market. Right now, the short and medium term trends are flat, the long term trend is still towards a weaker ZAR, and long term real money players are around 10.50 – 10.55 on USDZAR and are in control of the market. Keep an eye out on Thursday as any increase of say 50 basis points could see some quick moves.
Posted on: Tue, 15 Jul 2014 11:46:06 +0000
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