Trade Insights

USD/ZAR

15 September 2015 

Of all the economic data and announcements to be released this week it is safe to say all eyes will be on the US FOMC conference and Fed funds rate announcement due for Thursday at 8pm our time. Analysts are split 50/50 on the rate decision, which now supposedly has a 23% likelihood of resulting in a rate hike, by 25Bps. This may be the first time in nearly a decade that the rates are to be risen. Two different schools of thought seem to be appearing in the argument for and against the rate hike:

1. Those for the hike argue that a lack of an increase now perpetuates steeper increases further on down the line, having an even more detrimental effect on the market. It may also call Janet Yellen’s and the Fed’s credibility and their ability to make decisions into question.
2. Those against the hike sight market volatility, reactive emerging markets and un unstable and contracting Chinese economy as reasons to delay what seems like the inevitable.

Regardless of the above, what is prevalent is the data that the Fed takes into account which encompasses everything from Non-farm payroll numbers, unemployment, jobless claims data, wage inflation and core inflation (CPI), to name but a few. Core CPI being the last bit of influential data to print tomorrow, the day before the rate decision.

Despite the potential for reaction across emerging markets which could see liquidity dry up and negative cash flows for equity and (worse) bond markets, which could also lead to devaluation in the currencies as the USD becomes a haven for low risk return. The US has to be concerned about their own economy and inlationary targets, and all out, concern about how the rest of the world may react in the short term is not necessarily their biggest conundrum. In the short-term market, volatility will look to increase regardless of what happens so the VIX may be an interesting trade, but I think it will be worth a look at the Rand and what a potential rate hike means.

Technically, what we see is a consolidation at current levels with what seems to be a short term flag pattern that has formed. This is indicative of a continuation pattern where in the recent pullback after the strong upward trend has contracted and the expectation is for a breakout to the upside. The flag “pole” is used in the projection of the upside move which takes us back just below the highs at 13.95. The above and projected breakout is naturally in line with an increase in interest rates from the Fed and thus weakness in the Rand. Failure for lift off and the currency should continue in its range bound fashion with a projected move to support at least 13.48.