TRADE OF THE MONTH
Uncertainty continues as international investors remain wary because of the issue of land expropriation without compensation
During the course of this month global markets experienced some turmoil. The US market has pulled back from record highs, breaking the uptrend that has been in place for most of the year.
This leads to a flight to safety, and safe-haven assets are likely to come into favour.
This means the rand should continue to be fragile, so trading a long position on the USD/ZAR currency pair seems like a fairly safe play.
You can choose to either trade it by buying an ETN, like the New Wave USD Exchange Traded Note, or you can buy a USD/ZAR currency future or a contract for difference (CFD). The lower-risk option would be to buy the ETN as there is no gearing on the instrument.
The view that the rand will remain weak in the medium term is backed by a number of different catalysts.
First, there is the remaining uncertainty around exactly how the government wants to implement land expropriation without compensation.
This is a deterrent to international investors as they are not certain what the impact will be on fixed property investments.
We might know that private housing and commercial properties are likely to be unaffected by land expropriation without compensation, though international investors and large funds will probably not want to take that risk.
Second, we do not yet know what the final form of the new mining charter will look like. This is yet another source of uncertainty.
It is likely that neither of these overhangs will be resolved to the satisfaction of the outside world before the election in April 2019.
Third, we cannot ignore the fact that our economy is in recession and that we are being badly affected by higher oil prices (though this has eased lately).
The Reserve Bank moving to increase interest rates might provide some support for the rand, though the knock-on effect that could have on con- sumer spending might just be big enough to stay its hand.
Finally, turmoil in other emerging markets and uncertainties about Italy and its place in the European Union are likely to keep driving investors towards safe havens.
In conclusion, there are a great many factors stacked against the rand at this stage and it appears that for the next six to 12 months, things might not be so easy or turn around for our currency.
Therefore, profiting from it losing value against the dollar seems like the only logical course of action.
Short — J212 (Financial 15 Index)
This will have to be a derivative trade as shorting cannot be done without leverage.
There are two main options available to traders who want to short this index, either the J212 Index Future, or by taking a short position by making use of a CFD on the Satrix FINI Exchange Traded Fund.
Once again, this trade is somewhat focused on the same theme of the continued deterioration of the rand, though it looks to lock in profit by the financial and banking sectors coming under pressure. The inverse correlation between financials and the performance of the rand is well known, though it is not the only reason why a short position on financials has the potential to be successful.
The Reserve Bank does not have much room to increase interest rates, which is some relief to the banks at least as floating rate consumer debt (debt that is linked to the prevailing interest rate) does not come under more interestrate-driven pressures, though it also does mean the increased margins banks make on charging higher interest rates will not aid the banks in terms of earnings.
Not only that, but with the seemingly never-ceasing increase in unemployment, we must start to wonder how much longer consumers will be able to service their debts.
The possibility of an increase in defaults among bank customers remains prevalent.
In general, the financial sector is deemed the bellwether of the economy, and things in the economy are not looking good.
From a technical analysis standpoint, the Financial 15 index might have made a new high this year (2018), though it is only slightly higher than the high reached during 2014 and therefore can be seen as a potential multiyear double top.
If this is in fact the case, and focusing on the Satrix FINI ETF, we could see the index pull back below the lows of 2016 and drive the Satrix FINI ETF price down to the mid-to-low R12 region, if not lower.
With the seemingly never-ceasing increase in unemployment, we must start to wonder how much longer consumers will be able to service their debts. The possibility of an increase in defaults among bank customers remains prevalent