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

Financial Mail - Investors Monthly - - Contents -

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.

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