Cur­rency move­ments merit fresh con­sid­er­a­tion, given re­cent tech­ni­cal breaks

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

Cur­rency move­ments merit fresh con­sid­er­a­tion, given re­cent tech­ni­cal breaks

The charts of the US dol­lar in­dex and the rand-dol­lar ex­change rate were cov­ered in this column last month.

But some mean­ing­ful tech­ni­cal breaks have oc­curred over the past few weeks, so it is worth re­vis­it­ing those charts, as they have an im­por­tant bear­ing on SA in­vestors.

The US dol­lar has con­tin­ued to strengthen, and has pushed be­yond the 95 level that marks the neck­line of a large in­verted head and shoul­ders pat­tern on the US dol­lar in­dex. That break is a bullish break for the green­back, and it projects fur­ther strength for the US unit. The in­verted head and shoul­ders pat­tern projects a move to 101.50 over the medium term.

With the US Fed­eral Re­serve on a de­ter­mined path to raise in­ter­est rates — com­pared with other de­vel­oped coun­tries, which are keep­ing rates at ar­ti­fi­cially low lev­els — the dol­lar is likely to con­tinue to at­tract flows seek­ing a higher yield. While this in­ter­est rate dif­fer­en­tial re­mains in­tact, it is likely that the dol­lar will have the wind at its back for the fore­see­able fu­ture.

Only a tech­ni­cal break be­low 93 on the dol­lar in­dex would negate the bullish tech­ni­cal pat­tern. While the dol­lar in­dex is above 95, the bias will con­tinue to favour a strength­en­ing of the cur­rency.

This strength in the dol­lar has con­trib­uted some­what to a weak­en­ing of the rand, but the story is far more com­pli­cated than that. The value of the rand has come un­der se­vere pres­sure in re­cent weeks fol­low­ing jit­ters in emerg­ing mar­kets.

Turkey is the lat­est emerg­ing mar­ket to fall into cri­sis, and the value of the Turk­ish lira has lost half its value over the past year.

The cri­sis in Turkey has come about due to a high cur­rent ac­count deficit and high lev­els of for­eign debt. The cur­rency has col­lapsed af­ter high in­fla­tion, high bor­row­ing costs and high lev­els of debt de­fault.

This has soured the sen­ti­ment to­wards emerg­ing mar­kets in gen­eral, and it risks spread­ing con­ta­gion to other emerg­ing mar­kets with high cur­rent ac­count deficits and high lev­els of debt.

SA has a large cur­rent ac­count deficit, which is funded by high lev­els of debt. But, for­tu­nately, SA’s debt is pre­dom­i­nantly rand based. This means the fall­out has not been as se­vere as for other emerg­ing­mar­ket cur­ren­cies.

Nev­er­the­less, the rand has not es­caped the nega­tive sen­ti­ment, and the re­sult has been a rather sig­nif­i­cant tech­ni­cal break weaker for the rand against the dol­lar.

The chan­nel that has con­tained a strength­en­ing in the rand since the late-2015 “Nenegate” has now been bro­ken. The break above R14 to the dol­lar marks a break weaker for the rand out of that strength­en­ing chan­nel.

The move has been fairly swift, but it paints a bleak tech- nical pic­ture for the rand in the medium term. From a pure tech­ni­cal per­spec­tive the break through R14 could re­sult in a move back to­wards the lev­els north of R16/$ that were last seen in early 2016.

The R14 area now presents dol­lar sup­port/rand re­sis­tance, and it would take some do­ing for the rand to strengthen be­low that level. The more likely sce­nario, from a tech­ni­cal per­spec­tive, is that the rand will con­tinue on a grad­ual weak­en­ing tra­jec­tory.

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