Rand weakness capitulating?

The rand has had a torrid week, following emerging market peers lower in a risk off market environment. Emerging market currency weakness has followed the trade war and a strengthening US dollar rhetoric as well as economic woes surrounding Turkey.

The major factors affecting Turkey and its currency (the Lira) are the economic sanctioning war it has entered into with the US as well as questionable economic policy which is said to not address the rampant inflation within the region. The Lira has declined in excess of 36% this year (against the USD) and inflation within the region is now being realised at 16%. Markets are concerned around possible contagion spreading from the region. BNP Paribas, BBVA and Unicredit are the three European banks which are said to have the most exposure to Turkey.

The below graph shows the BRICS (Brazil, Russia, India, China, South Africa) currencies and the Turkish Lira performances against the US Dollar over the last week.

USD_BRICS 13082018

Technical Trade Update (ZAR)

The USD/ZAR has traded aggressively through the upside targets set in our previous note (below). The move up, while extending the uptrend seems to be a near term capitulation, and we question the sustainability of the move. The USD/ZAR currency pair is now moving out of overbought territory which supports the notion of capitulation. While this is still not seen as an opportunity to short the pair, we do believe that the rand could correct back to at least the R14.15/$ to R14.00/$ levels. Between R13.60/$ and R14.00/$ we would reconsider looking for long entries into the USD/ZAR once again. 

Technical trade update 13082018

Technical Trade View (Previous call)

The long term trend for the USD/ZAR currency pair remains up. After breaking out of a short term wedge price consolidation (blue arrow), the USD/ZAR currency pair pulled back to trend line support (circled blue) and now looks to be resuming this long term uptrend.

From a trading perspective, R13.60/$ is the favoured target from the move, a break of which further favours R14/$ as the next upside resistance target. Should the USD/ZAR instead move to close below R13.10/$ the bullish assumptions would be deemed to have failed.

Rand 13082018

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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