TALKING TECHNICALS

Don’t expect a miraculous recovery for the rand — in January it tends to weaken

The rand’s outlook historically for January is poor

The rand has been on a slippery slope over the past few years. Unfortunately, the outlook for the currency is not looking good from current levels either. The gradual trend of weakness in the rand/dollar exchange rate is clear to see in the chart.

Fundamentally, SA is battling to contain the widening of the current account deficit and this is a primary reason for the rand’s weakness. This deficit represents the fact that we are importing more than we are exporting in SA. So more rands are being sold to buy foreign currency to purchase our imports than are being earned from the sale of South African-made goods abroad. Our manufacturing sector continues to struggle and remains uncompetitive internationally as the government fails to provide an environment for business to thrive. That’s why so many South African companies are seeking growth opportunities beyond our borders and there is a severe lack of foreign business interest in investing in SA.

SA’s current weak leadership has resulted in our economy stalling and the outlook for growth remains anaemic.

Weak commodity prices are not helping either and what commodities we are exporting are yielding less in foreign currency inflows.

Couple this with recent downgrades by the credit ratings agencies and it is understandable that the rand is on the back foot and its future looks bleak.

From a technical perspective, the currency has been forming an ascending triangle pattern over the past year. These are typically continuation patterns within a trend, and usually break in the direction of the trend. In this case, the rand is on a weakening trend, so the greater likelihood is that the currency will break weaker when it resolves out of this pattern. The critical levels to monitor in the near term are R10.90 at the lower end and R11.40 at the upper end. A break beyond R11.40 will be a very bearish break for the rand and will open a projected target of R12.50. From a trading perspective, the way to trade this will be to gradually build a short rand position on any near-term rand strength into the R10.90-R11.00 area in anticipation of a break weaker, or alternatively to short the rand on a break through R11.40. Only a convincing break below R10.70 will question the bearish outlook for the rand and that would be a logical area to place a stop loss on a short rand trade.

Seasonally, there has been a consistent pattern for the rand during January over the past 11 years. The rand seems to weaken dramatically during January in most years. Certainly in nine of the past 11 years we have observed this. The table above illustrates the movements in the rand from December 31 to January 31 in each of the years since 2004. It can be seen that during those years, when the rand has weakened, it has weakened by an average of 6.56%. In the two years where it strengthened, it did not strengthen dramatically. There are a number of theories put forward for this movement, the most common being repatriation of year-end profits by large foreign-owned companies at the end of each year. Whether this is true is debatable, but the evidence is strong: the rand seems to have a high propensity to weaken each year in January.

Given the technical set-up as we see it now, it would not be too surprising to see the rand weaken in January 2015, particularly if we see a period of consolidation in the month ahead. This is worth keeping an eye on as we head closer to the end of 2014 and into the beginning of 2015.