TALKING TECHNICALS

Currency movements merit fresh consideration, given recent technical breaks

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.