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RAND ANALYSIS: What next for unit as it hits worst level of 2018?

May 25 2018 06:00
James Paynter

PHEW, what a week!

There is certainly a reason that the rand has the name-tag of the world's most volatile currency, with swings high and low making it a nightmare for most who deal in foreign exchange.

This week was no different. We saw big highs and lows, with not much time in between.

Volatility is nothing new to us but considering the calm there has been since the start of 2018, with a range of around 80 cents to 90c in over four months, this has been quite a thump back to reality for some.

With the week starting with the rand having just breached R12.20 after a great week's effort, things were starting to look rosy. Often, though, that's exactly when trouble is just over the horizon.

And so it proved to be as the local currency took a pounding, although it wasn't one-way traffic!

Once again, the charts patterns kept our subscribers on top of their game, cutting through all the hype and providing a roadmap through the storm.

Let’s review:

At the end of the previous week, on May 11 2018, the outlook for the upcoming days was published – and it had been nothing short of volatile leading up to this, making it all the more difficult.

The break down to R12.17 had jeopardised the preferred wave count, but the outlook was still for a move above R12.362, with the bias towards a break above R12.4515 and above... a sure heads-up that this was going to be a humdinger of a week!

rand


And there were some key moments worth mentioning, just to add to the volatility: 

• The cost of state capture: Pravin Gordhan gave a chilling estimate as to just how much state capture has cost SA - if true, it is absolutely shocking.

• Oil soars: making things ever more expensive for motorists, the oil price steamrolled toward $80 on the back of tensions between the US and Iran.

• Bus strikes: finally an end was reached, but not before millions of rands had been lost due to the loss of business.

• US & North Korea: things turned a little sour, with the Little Rocket Man threatening to pull out of the Trump meeting, and pulling out of some South Korean talks too.

• Trump and China make up: it seems the fated trade war is slowly dissipating, as Trump is now working together with the Chinese president.

And the week turned out to be nothing short of nerve-wracking. The rand started off hovering around R12.25, then spiked up to R12.65 - as per our forecast above - from Friday, then fell hard to bounce off R12.39, testing very close to our invalidation levels.

friday forecast

And by the time we were testing those levels, we were due for our next forecast update on Wednesday evening.

And yet again, the rand was at a critical juncture - what now?

Well, despite the anxiety that naturally tends to come to the fore, and the apparent downside momentum the market was gaining, we had to trust the charts and the Elliott Wave Principle.

The more murky the conditions when a pilot is flying his plane, the more he has to trust his instruments, rather than his gut feel - even when his emotions are screaming the opposite. 

(Remember that Air France flight from some years back, which crashed in the ocean with all passengers and crew? Post analysis showed that the pilot continued pulling the stick back, not trusting his instruments, until the plane was near vertical, resulting in a stall... his emotions took over, and the results were fatal.)

And so, we stuck to our instruments, and released our forecast based on what our analysis was telling us.

rand 2

And what it told us was simple and clear:

With the market at R12.43, we were expecting a bottoming out in the R12.44 to R12.34 area, and then heading upward with a break above R12.5147 confirming a move above R12.6482.

And on Friday, this was what we saw, just as anticipated:

wednesday's forecast

And so ended another massively volatile week, with another very timely reminder - do NOT trust your emotions in this game!

An objective view as to where the market is headed is imperative to keeping the emotions under control - but then we need to trust them too, as being the best information available to us at the time.

We warned of some volatile weeks ahead, and the local currency certainly hasn't disappointed in providing that. Not that it is anything anyone enjoys, especially when your profit margins are fluctuating so wildly.

But do not expect this to end anytime soon.

We are heading into some critical pricing areas the next week or so, and we will need to keep our eyes firmly on what the patterns are telling us.

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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james paynter  |  opinion  |  rand  |  markets  |  currencies
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