3Q2023 USDZAR weekly timeframe
Updated
Back in January I predicted that the USDZAR pair will climb to the 2020 high of 19.35 if the rand fails to hold the pair below the critical support rate of 16.80. We’ve seen this move play out, and then some, which saw the rand slide to an all-time low of 19.90 this week as the pair completed its 5th major impulse wave. Now it’s time to look at what lies ahead for 2H2023.
The critical rate to watch is at 18.66, the blue 38.2% Fibo retracement rate…
Based purely off the Elliot wave theory I predict that the pair will fall into an ABC corrective pattern in 3Q2023, similar to the corrective pattern we saw in the 4Q2022. The first support range (S1) for the pair sits between 19.15 and 19.35 (the blue 23.6% Fibo retracement rate and the 2020 high). A break below this range will allow the rand to pull the pair onto the blue 38.2% Fibo retracement rate of 18.66. A move into support range 2 (S2) will complete wave A of the ABC corrective pattern. Support range 2 coincides with the bottom of the blue upward channel that the pair is currently trading in as well as the top of the previous third impulse wave. I don’t see the rand gaining enough momentum to pull the pair below support range 2 at this stage.
Thereafter, the pair will retest S1 as it flips from a support to a resistance and the ABC corrective pattern will be complete after the pair falls back onto the critical support rate of 18.66. A break below 18.66 in the 4Q2023 will allow the rand to pull the pair out of the current upward black parallel channel and into support range 3 (the blue 61.8% Fibo retracement rate at 17.92 and the bottom of the ABC corrective wave at 17.67) which coincides with the 50-week MA currently at 17.64. This scenario is the best-case scenario for the rand in my opinion. For the rand to pull the pair below S3 we would need to see another strong bull market in the commodity cycle.
Conversely, if the critical support at 18.66 holds its ground the pair will remain in the upward black channel which will send the pair higher in the 20.00’s.
Weekly technical indicators: The weekly RSI suggests that the rand is heavily oversold at the moment which will allow the rand some breathing room, on paper. The weekly MACD is still holding a strong buy signal, but it is showing signs of fizzling out and rolling over. Overall, the technical indicators are supportive of a rand pullback into S1 and possibly deeper into S2. We have to wait to see how the market digests the NFP’s print later today but as it stands the pair could generate a hammer candle which will indicate the top of the current wave, which is also supportive of some relief for the battered rand.
Fundamental factors: The fundamental factors are unfortunately stacked against the rand. I’ll start with the factors I deem as rand positive.
Rand positive:
• For those familiar with my USDZAR ideas, I always look at the price of precious metals, particularly platinum as SA is the world’s largest platinum producer by a country mile (I’ll do a separate idea on platinum and link the idea in the comments). The platinum price topped out around 1130/ounce this year in April and has fallen roughly 12% since then. The metal is however finding support around the 1000/ounce level which is positive for the rand and platinum. The price of platinum looks set to remain supported by the fact that the platinum market is expected to remain in a substantial deficit this year, largely due to the sanctions imposed on Russia and SA’s mining production constraints largely caused by the current electricity uncertainties. (reuters.com/markets/commodities/rising-demand-automakers-pushing-platinum-into-deficit-jm-says-2023-05-15/)
• Regarding the liquidity landscape and US monetary policy, it seems as if global financial conditions are easing, and excess liquidity is rising, which will allow the rand to hopefully attract some foreign fiat given the rand’s carry trade appeal. Short-term rates seem to be peaking not just in the US but globally. Once global rates have peaked, it will allow the market to price in a future cyclical upturn for the US economy. Longer-term yields will capture this sentiment by moving higher as investors will prefer riskier assets (such as the rand and SA bonds) to reap the rewards on buoyant liquidity conditions. The US debt ceiling debacle will also be resolved soon which will bring investors at ease that more fresh liquidity will hit the markets.
Rand negative:
• The rand negative factors are largely due to the ongoing geopolitical factors, but before we get into that I’d just like to touch on SA’s trade balance. Earlier this week SA’s latest trade balance results were released, and the trade surplus is fizzling out. The last three trade balance totals were R10.71 billion, R6.30 billion and the latest balance stands at R3.54 billion. This decline in SA’s trade surplus is rand negative.
• In terms of the geopolitical landscape and SA’s electricity uncertainties things aren’t looking pretty for the rand. The SARB’s Financial Stability Report from May 2023 did not make for pretty reading. The major idiosyncratic risk, which is still fresh to market participants, is the deterioration of SA’s diplomatic relations with the US following the comments by the US Ambassador to SA on 11 May 2023. Despite the claims being baseless, SA’s non-alignment stance in the conflict in Ukraine is hugely rand negative. The SARB highlighted the risk of secondary sanctions which could be imposed on SA due to the neutral stance. US Secretary of the Treasury, Janet Yellen, also explicitly warned SA when she visited back in January this year, to take the sanctions imposed on Russia seriously. Coupled with the Financial Action Task Force grey listing of SA financial institutions in February this year the potential implications for the SA economy are severe. If secondary sanctions are imposed on SA, it will make it impossible to finance any trade or investment flows, or to make or receive any payments from correspondent banks in US dollars. Furthermore, more than 90% of SA’s international payments, in whichever currency, are currently processed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payment system. Should SA be banned from SWIFT because of secondary sanctions, these payments will not be possible.
• Additionally, the SARB highlighted SA’s electricity uncertainty and deteriorating rail and port infrastructure. In connection with the declining infrastructure is the amount of State-Owned Enterprise (SOE) debt relative to SA’s emerging market peers. SA has one of the highest SOE debt among emerging market currencies and as the government takes over the SOE debt the local tax payer and bond investor will have to foot the bill.
• The above-mentioned factors have led to a mass exodus of funds out of SA and as mentioned earlier, local investors will have to absorb the sell-off from foreign investors. The proportion of SA Government bonds held by foreign investors has declined from 42% in April 2018 to 25% in February2023.
If you got to here, I highly appreciate you taking the time to read and review my idea <3. I’ll update this idea as 3Q2023 progresses.
The critical rate to watch is at 18.66, the blue 38.2% Fibo retracement rate…
Based purely off the Elliot wave theory I predict that the pair will fall into an ABC corrective pattern in 3Q2023, similar to the corrective pattern we saw in the 4Q2022. The first support range (S1) for the pair sits between 19.15 and 19.35 (the blue 23.6% Fibo retracement rate and the 2020 high). A break below this range will allow the rand to pull the pair onto the blue 38.2% Fibo retracement rate of 18.66. A move into support range 2 (S2) will complete wave A of the ABC corrective pattern. Support range 2 coincides with the bottom of the blue upward channel that the pair is currently trading in as well as the top of the previous third impulse wave. I don’t see the rand gaining enough momentum to pull the pair below support range 2 at this stage.
Thereafter, the pair will retest S1 as it flips from a support to a resistance and the ABC corrective pattern will be complete after the pair falls back onto the critical support rate of 18.66. A break below 18.66 in the 4Q2023 will allow the rand to pull the pair out of the current upward black parallel channel and into support range 3 (the blue 61.8% Fibo retracement rate at 17.92 and the bottom of the ABC corrective wave at 17.67) which coincides with the 50-week MA currently at 17.64. This scenario is the best-case scenario for the rand in my opinion. For the rand to pull the pair below S3 we would need to see another strong bull market in the commodity cycle.
Conversely, if the critical support at 18.66 holds its ground the pair will remain in the upward black channel which will send the pair higher in the 20.00’s.
Weekly technical indicators: The weekly RSI suggests that the rand is heavily oversold at the moment which will allow the rand some breathing room, on paper. The weekly MACD is still holding a strong buy signal, but it is showing signs of fizzling out and rolling over. Overall, the technical indicators are supportive of a rand pullback into S1 and possibly deeper into S2. We have to wait to see how the market digests the NFP’s print later today but as it stands the pair could generate a hammer candle which will indicate the top of the current wave, which is also supportive of some relief for the battered rand.
Fundamental factors: The fundamental factors are unfortunately stacked against the rand. I’ll start with the factors I deem as rand positive.
Rand positive:
• For those familiar with my USDZAR ideas, I always look at the price of precious metals, particularly platinum as SA is the world’s largest platinum producer by a country mile (I’ll do a separate idea on platinum and link the idea in the comments). The platinum price topped out around 1130/ounce this year in April and has fallen roughly 12% since then. The metal is however finding support around the 1000/ounce level which is positive for the rand and platinum. The price of platinum looks set to remain supported by the fact that the platinum market is expected to remain in a substantial deficit this year, largely due to the sanctions imposed on Russia and SA’s mining production constraints largely caused by the current electricity uncertainties. (reuters.com/markets/commodities/rising-demand-automakers-pushing-platinum-into-deficit-jm-says-2023-05-15/)
• Regarding the liquidity landscape and US monetary policy, it seems as if global financial conditions are easing, and excess liquidity is rising, which will allow the rand to hopefully attract some foreign fiat given the rand’s carry trade appeal. Short-term rates seem to be peaking not just in the US but globally. Once global rates have peaked, it will allow the market to price in a future cyclical upturn for the US economy. Longer-term yields will capture this sentiment by moving higher as investors will prefer riskier assets (such as the rand and SA bonds) to reap the rewards on buoyant liquidity conditions. The US debt ceiling debacle will also be resolved soon which will bring investors at ease that more fresh liquidity will hit the markets.
Rand negative:
• The rand negative factors are largely due to the ongoing geopolitical factors, but before we get into that I’d just like to touch on SA’s trade balance. Earlier this week SA’s latest trade balance results were released, and the trade surplus is fizzling out. The last three trade balance totals were R10.71 billion, R6.30 billion and the latest balance stands at R3.54 billion. This decline in SA’s trade surplus is rand negative.
• In terms of the geopolitical landscape and SA’s electricity uncertainties things aren’t looking pretty for the rand. The SARB’s Financial Stability Report from May 2023 did not make for pretty reading. The major idiosyncratic risk, which is still fresh to market participants, is the deterioration of SA’s diplomatic relations with the US following the comments by the US Ambassador to SA on 11 May 2023. Despite the claims being baseless, SA’s non-alignment stance in the conflict in Ukraine is hugely rand negative. The SARB highlighted the risk of secondary sanctions which could be imposed on SA due to the neutral stance. US Secretary of the Treasury, Janet Yellen, also explicitly warned SA when she visited back in January this year, to take the sanctions imposed on Russia seriously. Coupled with the Financial Action Task Force grey listing of SA financial institutions in February this year the potential implications for the SA economy are severe. If secondary sanctions are imposed on SA, it will make it impossible to finance any trade or investment flows, or to make or receive any payments from correspondent banks in US dollars. Furthermore, more than 90% of SA’s international payments, in whichever currency, are currently processed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payment system. Should SA be banned from SWIFT because of secondary sanctions, these payments will not be possible.
• Additionally, the SARB highlighted SA’s electricity uncertainty and deteriorating rail and port infrastructure. In connection with the declining infrastructure is the amount of State-Owned Enterprise (SOE) debt relative to SA’s emerging market peers. SA has one of the highest SOE debt among emerging market currencies and as the government takes over the SOE debt the local tax payer and bond investor will have to foot the bill.
• The above-mentioned factors have led to a mass exodus of funds out of SA and as mentioned earlier, local investors will have to absorb the sell-off from foreign investors. The proportion of SA Government bonds held by foreign investors has declined from 42% in April 2018 to 25% in February2023.
If you got to here, I highly appreciate you taking the time to read and review my idea <3. I’ll update this idea as 3Q2023 progresses.
Note
Wave A onto the 50-day MA has been completed. I'm expecting strong support in zone S2. The pair is currently testing this support zone which coincides with the bottom of the current blue upward channel.Note
Navy channel broke as well as support range 2 (S2).A break below 50% Fibo at 18.29 will allow the rand to pull the pair onto 61.8% fibo a 17.92 which coincides with 200-day MA at 17.96.
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