The dollar and the pound have strength­ened and lo­cal fac­tors count too

Financial Mail - Investors Monthly - - Contents - GARTH MACKENZIE www.trader­

The rand is on a steadily weak­en­ing trend

The weekly charts of both the rand-dollar ex­change rate and the rand-pound ex­change rate clearly il­lus­trate the steadily weak­en­ing trend that has been in place for the rand since 2011. In the four years since the mid­dle of 2011, the rand has weak­ened by 72% against the pound and by 80% against the dollar. The out­look for the rand con­tin­ues to look bleak from a fun­da­men­tal per­spec­tive as well as a tech­ni­cal per­spec­tive.

Fac­tors such as a grad­u­ally widen­ing cur­rent ac­count deficit, slug­gish eco­nomic growth and poor po­lit­i­cal lead­er­ship con­tinue to weigh on the rand. The threat of fur­ther rat­ings down­grades does not help mat­ters and th­ese fac­tors are likely to mean that the rand re­mains on the back foot for the fore­see­able fu­ture. Tech­ni­cally there is no deny­ing the weak­en­ing tra­jec­tory of the rand, and as the say­ing goes “the trend is your friend” — or maybe not, when you are a South African watch­ing our cur­rency de­pre­ci­ate at an alarm­ing rate.

The rand-pound ex­change rate has been range-bound for the past year and a half, be­tween R17,00 and R18,40. This side­ways trad­ing ac­tiv­ity has al­lowed the long-term trend of rand weak­ness to catch up to the trad­ing ac­tion and we re­cently saw the rand re­verse off the long-term weak­en­ing trend at R17.50 in April. We’ve now seen the rand weaken back to­wards the top of the range and it is threat­en­ing to make a sig­nif­i­cant break weaker. The UK elec­tion re­sult was a pos­i­tive sur­prise which saw the pound strengthen against all cur­ren­cies, the rand in­cluded. The Con­ser­va­tive Party’s clear victory looks set to put the pound on a strength­en­ing path for the fore­see­able fu­ture. This devel­op­ment cor­re­sponds with a pow­er­ful break stronger for the pound and will add to the fac­tors that are driv­ing the rand weaker. A con­vinc­ing break be­yond R18,40 for the rand-pound ex­change rate opens an ini­tial tech­ni­cal tar­get of R19,50 but look­ing fur­ther out there is no rea­son to think the rand will not weaken be­yond that level over time. Only a con­vinc­ing break be­low R17,00 to the pound would begin to ques­tion the weak tech­ni­cal out­look for the rand. At this stage that looks highly un­likely and it’s more prob­a­ble the rand will con­tinue to weaken against the pound.

The out­look for the rand-dollar ex­change rate is equally bleak. The ex­change rate has been in a steadily weak­en­ing chan­nel since mid-2011. The rand is cur­rently testing its long-term weak­en­ing trend against the dollar at R11,70. This level cor­re­sponds with an area of lat­eral sup­port at R11,70 that marked a pre­vi­ous area of re­sis­tance through De­cem­ber 2014 to Fe­bru­ary 2015. The R11,70 level is there­fore a very mean­ing­ful tech­ni­cal level where there is a strong like­li­hood that dol­lars will be bought and rands sold. A re­ver­sal up from R11,70 will likely see the rand begin to weaken again. An ini­tial tar­get for any rand weak­ness would be R12,50, which was the re­cent weak­est level, achieved in March 2015. A break be­yond R12,50 could quite likely see the cur­rency move to­wards the up­per end of the long-term weak­en­ing chan­nel at R13,50. On a medium-term hori­zon, the rand looks set to con­tinue weak­en­ing against the dollar — par­tic­u­larly as the dollar is on a strength­en­ing trend of its own against all cur­ren­cies. Only a con­vinc­ing and sus­tained break be­low R11,50 might begin to ques­tion the bear­ish out­look for the rand. That looks highly un­likely as things stand.

Lo­cal in­vestors would be well ad­vised to grad­u­ally di­ver­sify their in­vest­ments to achieve off­shore ex­po­sure, as has been sug­gested in this col­umn many times over the past few years.

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