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#JunkStatus, #Zexit, Cyril & the rand – The irrational truth

Mar 05 2018 20:30
James Paynter

ISN’T it uncanny how, time and again, when the news is about the worst it can get, that the rand pulls a fast one against everyone’s expectation? 

And then, just when everyone has started to get super rand-confident on the back of positive events and news…then the rand suddenly weakens – contrary to rational logic. 

Will anyone ever forget #GordhanGate in March 2017…

 …when Zuma decided it was time to throw all caution (and what was left of the country’s international standing) to the wind, and pull out his big guns in the now infamous midnight #CabinetResfuffle? And how the rand quickly jumped almost a full 100c to the dollar in response…

And then, of course, rating agencies were not slow in realising the implications of this self-serving action…

 The result – inevitable #Downgrades by all 3 agencies

What everyone was fearing since #Nenegate (and what ex-ex-finance minister Pravin Gordhan was doing his best to prevent) – had now actually happened.

This was the end – the rand was expected to run for the door! And yet, against all expectations, it actually peaked 2 days later and over the next few weeks strengthened below pre-Cabinet reshuffle levels. Make any logical sense? I don’t think so either. 

Just an anomaly maybe?

Well, let’s look at some more recent history. 

Below is a weekly chart of the rand for the past year, depicting some of the more notable events, including the ‘bad news’ April downgrades, and showing the subsequent strengthening over the next 2 months to pre #CabinetReshuffle levels.

An impressive recovery indeed.

Zar weekly

Image 1. Events vs the USD/ZAR since the start of 2017

But that isn’t nearly as impressive as Zuma’s last desperate #CabinetReshuffle in late October 2017 to try and push his Russia nuclear deal through…

…again, the rand reacted, weakening over the next few weeks to touch its worst level for the year at 14.57.

And this time, rating agencies took full notice of these actions, and Standard & Poor's brought their guillotine down - full #JunkStatus!  

Yet, how did the rand react?

By immediately strengthening, and continuing to do so over the coming weeks, extending its gains even in the run-up to the closely contested ANC elections – only stalling to take a breather once Cyril Ramaphosa was elected.

And after a brief lull, the rand’s continued its impressive run in February to hit its best levels in 3 years, spurred on by a whirlwind fortnight full of "good news": Zuma’s long-awaited exit … a new charismatic President … a well-received SONA … a budget that appeared reasonable in the circumstances … and Cyril’s first Cabinet Reshuffle (showing who is in charge).

All these "positive events" should have spurred the already-fired-up Rand to extend its gains ….

…yet what happened?

The rand seemed to take all this as a cue to stop dead in its tracks – and head north!

Seems to defy logic, doesn’t it? Certainly no economist would have been able to explain - or predict this! And yet, when you understand that markets are moved by sentiment, which swings from one extreme of sentiment to the other, it all starts to fall into place.

And when you understand that persons do extreme things at heightened levels of emotion (whether positive or negative), it also explains the extreme shock events that seem to happen at market highs and lows.

In fact, our Elliott Wave model, which uses these patterns of mass psychology in the market to predict future movement, had seen both these events coming – beforehand. Skeptical? I don’t blame you if you are, as this model’s uncanny ability to forecast reactions to major shock events still amazes me after 12 years following it.

Below was the outlook on the dollar/rand for next few weeks published on 25 October 2017 (with the rand at 14.05), which anticipated a move up into the 14.14 to 14.58 area before topping out and falling…. ...which the rand duly did by hitting 14.57 on 13 November before reversing sharply.

Near term outlook

Image 2. Near Term Outlook (next few weeks) of the USD/ZAR from 25 October 2017

And then, when the rand had fallen to hit 11.6293 on 16 February 2018, the day of President Ramaphosa’s SONA (and 2 days after Zuma had resigned), when everyone was upbeat, our near term forecast painted a very different picture….

Zar USD

Image 3. Near Term Outlook (next few weeks) of the USD/ZAR from 16 February 2018 

This showed an imminent reversal of fortunes for the rand and for the rand to weaken considerably in the coming weeks. 

Pretty amazing stuff, when market sentiment at face value suggested just the opposite! 

And this was without knowing what events would trigger such a reversal, except that my 20 year experience was to expect some extreme emotional event...

…which the EFF duly handed us 2 days after the rand’s touching 11.50 – in their ill-fated Communist motion to amend the Constitution to allow Expropriation of Land without Compensation.So, what can we learn from this? 

• More often than not, the market will act irrationally – in exactly the opposite way to what common sense would tell you.

• Extreme emotional decisions and events often occur at these market extremes – but do not expect them to provide you with direction.

• When you are thinking to yourself, “Can the news get any worse – or any better – than this for the rand?” … the answer is more often than not “No, it won’t” (and even more so when everyone around you is feeling the same as you).

So how do you protect yourself from making wrong decisions at these points of extreme sentiment, whether positive or negative?

By making sure that you have an objective, scientific-based view of the market that enables you to make educated, informed and rational decisions, instead of emotionally-charged irrational ones (which we will default to every time…) 

* James Paynter is a financial market analyst and founder of Dynamic Outcomes. Opinions expressed are his own.

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opinion  |  rand  |  markets  |  currencies
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