Another rollercoaster year for the rand ... what lies ahead?

Another rollercoaster year for the rand has passed...and here we are with January already past us in a flash.

Who would have believed we would have ended such a tumultuous year with the local currency making its second straight year of net gains...and pushing to below 12.00 since?

What makes it even more surprising is that 2017 was plagued with rand-pummelling events, as the local currency was buffeted by one storm after another - from economic, to social...and of course, political.

One could fill a book with them, but some ‘highlights’ include…

more #StateCapture revelations…to #GordhanGate and #JunkStatus.  

From #GuptaLeaks and #FeesMustFall protests to #CabinetReshuffles and #ZumaMustGo marches and no confidence votes (which Zuma managed to survive... but not his numerous court challenges to justice having its way).

Not to talk about the woeful economic outlook, and a deepening water and energy crisis - together with increasing rapid economic transformation rhetoric.

And, of course, ANC in-fighting ahead of a closely-contested ANC election ...with Cyril Ramaphosa eventually coming up trumps ...but not with all the cards he would have liked in his hand.  

Rather a woeful list of mostly low notes…

Yet strangely - and against all conventional wisdom and rational thinking - just when the rand appeared to be finally on the ropes, back it would bounce (sounds like some politician we have come to know so well)!

In fact, it seemed to take the worst news possible - like #JunkStatus downgrades - to spark life back into the rand and trigger a significant strengthening, as the below chart shows.

Figure 1. USDZAR 2017 History   

This is something that completely baffles the rational mind - laymen and economists alike.

That is because, contrary to mainstream economic theories and conventional wisdom, 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.

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!

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 three 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.

Figure 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…

Figure 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 two days before the ratings agencies were expected to announce their decisions, we updated this outlook, keeping our eyes focused exclusively on what the sentiment patterns were telling us…

….while economists and everyone else were instead focusing on the likely effects of the credit rating decision.

(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.

Figure 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).  

So now, the question is that the rand has touched new two and a half year lows - is this overdone?  What can be expected for 2018?

Based on our forecasting model, a bounce is imminent, partially retracing the rand’s recent gains, but the larger degree rand-positive trend has still some way to go.  You will know it is finally running out of steam when there is no-one left to turn rand positive.  

For more info on the rand and the way forward from here, go here:

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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