The year the rand surprised...what will 2017 bring?


A new year has dawned...

And for many, the year 2016 is one best forgotten.  And for good reason too.

Last year was one of the most tumultuous years we have seen from an economic, political and social point of view, with multiple shocks hitting front page news throughout the year and ensuring that business confidence and growth were kept at depressing levels.

But amidst all this gloomy background, there emerged an unlikely hero - the rand.

Yes, it has been comeback time for the local currency.

After being pummelled in each of the prior five years, the rand ended the year with its head held high, having gained 11.2% against the Dollar (even more against the pound), and in so doing being named the 5th best performing currency against the dollar for 2016 after Russia, Brazil, Iceland, and Zambia.

...not without major volatility, mind you - averaging 30 cents (2 percent) moves per day!

It was also the rand’s 6th best performance over the past 35 years - pretty impressive!

If you look at the background against which these gains were made (the rand started the year on the ropes, and was continually dealt body blows at regular intervals); there is no logical explanation whatever for this significant gain in value.   

And that is why many people have been hurt this past year, expecting the rand to fall out of bed (or out of the ring) at the next bit of bad news - even as it steadily gained against the dollar.

At this time last year, all the pundits were forecasting a dreadful year for the currency, simply looking at the past and extrapolating it into the future.  

Bad performance + bad news = worse performance. 

Simple rational logic, right?

Well, clearly that that didn’t happen.  Why?

Because the markets are not moved by rational logic, but by irrational emotional human beings.  

And just as we have cycles in nature (night and day, ebb and flow, high tide and low tide, winter and summer), so there are cycles in human nature - which are especially seen in financial markets.

So instead of the markets moving in a straight line, they move in a zigzag fashion as the emotionally charged decisions of millions of people.   These emotions swing from one extreme (of hope and greed) to the other (of fear and despair), and drive the market to trend and countertrend, in larger and smaller degrees.

Early 2016, when the rand peaked at 17.81, was an example of an extreme (of rand negative sentiment) which had been reached on multiple time frames.

At this point there was no-one left to turn rand negative, and it was time for the tide to turn.

Which it did.

Sharply.  

And for the majority, very unexpectedly…

But if you were following the patterns of sentiment, which our Elliott Wave model does, the doom and gloom only confirmed that a major reversal was at hand.   

Contrary to all opinion, our analysis at that point was suggesting a move down into the 14.55 to 12.50 area - with an interim bounce off support at around 14.00.

Which of course has played out - against a year of extremely negative events and outlook.

So now, what surprises lie in store for 2017?   

Plenty no doubt.  

But, to avoid getting hurt this year, please understand the following:

  • The rand will not move in a logical manner, or as is generally anticipated.
  • We all naturally make emotionally charged decisions.  BUT if you let your decisions dictate your business or personal foreign exchange decisions, you will likely make the wrong decision - every time!
  • The stronger the general consensus that the rand is expected to move in one direction, the more likely it is to move in the opposite direction.

When you understand these 3 secrets, you are better off than 95% of the population.  

But you still need to keep your emotions in check by having some objective view and strategy for managing your currency exposures..

For more information on the rand and the way ahead visit www.ForexForecasts.co.za/go/RandReview 

James Paynter is Head Analyst at Dynamic Outcomes, a specialist forex solutions company that provides forecasts, tools and solutions to clients with rand foreign currency exposures, to reduce and manage their risk and optimize the timing of their transactions.


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