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Sponsored: The rand, #JunkStatus, and irrational logic

Isn’t it amazing how time and again, when the news is about the worst it can get, that the rand pulls a fast one against everyone’s expectation.

Will anyone forget the last week of March this year when, after days of rumours, Zuma decided it was time to throw all caution (and what was left of the country’s international standing) to the wind, and pull out his big guns in the now infamous midnight #CabinetResfuffle?  

Rating agencies were not slow in realising the implications of this self-serving action, and within the next few days all three ratings agencies had downgraded South Africa to junk status.

This is what everyone had been fearing since #Nenegate, and what ex-ex-Finance Minister Pravin Gordhan and his deputy had been doing their utmost since that time to avoid.

And no it had happened.

This was the end - the rand was finished!

Rational thinking and common logic dictated it must be.  

And yet, against all expectations, look what happened?  

The Rand actually peaked two days after the last downgrade, and has not looked back since.

And now, just two months later, here it is below 13, sitting at pre-CabinetReshuffle levels.

Make any logical sense?  I don’t think so either.

So how do we explain this irrational behaviour?

Well, having being in this game for over 20 years, I have learnt to expect the unexpected when it comes to the markets.  

So the first thing I did when #JunkStatus hit and many clients were saying that this must change our outlook for the rand, was to look at what effect such an action has had on other currencies.

And who better than two of SA’s ‘BRICS buddies’ - Brazil and Russia who had been downgraded in early 2015 and 2016 respectively.

And the results were more than interesting, to say the least.

As can be seen from this chart, the Russian rouble weakened significantly in the months leading up to being downgraded.  
 

But following the actual event, the currency turned and strengthened for the next six months!  And although it then pushed higher than downgrade levels in late 2015, this was short lived, and the rouble has strengthened since early 2016 to back below pre-junk levels.

Make logical sense?  Not really!

Let’s take a look at Brazil…
 

Similarly, Brazil weakened consistently for well over a year leading up to being downgraded in late 2015/early 2016.

And what happened once the last of the three rating agencies had pulled the plug?

The real strengthened.  And continued to do so for the next year!

Again, make rational sense?  

No economist would have been able to explain - or predict this!

And yet our Elliott Wave model, which uses the patterns of mass psychology in the market to predict future movement, had seen this coming beforehand.

Sceptical?

I don’t blame you if you are, as this model’s uncanny ability to forecast reactions to major shock events still amazes me after 12 years following it.

Here was our outlook on the dollar/rand for next few weeks published on 3 April 2017 (with the rand at 13.40), which anticipated a move up into the 13.64 to 14.15 area before topping out and falling….

...which the rand duly did by hitting 13.9550 a week later before reversing sharply.

Pretty amazing stuff, when market sentiment at face value suggested the opposite!

So, what can we learn from this?

  • More often than not, the market will do the opposite of what common sense will tell you.
  • Test out these theories based on Economics 101 to see whether they have any historical validity (you will be surprised at what you find)
  • When you are thinking to yourself, “Can the news get any worse than this for the rand?”  … the answer is more often than not “No, it won’t” (even when everyone around you is feeling the opposite).

And then, make sure that you have an objective, scientific-based view of the market that enables you to make informed and objective decisions, especially at times of extreme volatility, when panic decisions tend to take over.

For more info on the rand and the way forward from here, go to: www.forexforecasts.co.za/go/randreview

To your success and beyond~ 


James Paynter

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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