Looking ahead towards scheduled indicators for release later this month, the second quarter current account balance and consumer price index for August will begin to boast early market predictions. The reason for so much interest in these two indicators lies in comments issued by Reserve Bank Governor Tito Mbowenis last week. Mboweni said in a speech to businesspeople in Johannesburg that both a spending spree stoked amongst consumers after previous rate cuts and an inordinate demand for exports on a cheap rand had unbalanced [the] economy. The trade account will be the first indicator to playing on the governors comments, and the outlook is not towards moderating the demand for South African produced goods. Over the three-month period, the rand dropped a massive 26 percent against the US dollar. This while commodities prices were approaching or still at their recent historical highs. Concerning the inflation aspect in the market, the August CPI read will be measured against the previous months two-year high 4.9 percent core read. Both of these indicators should clear the way for the central bank to consider a third rate hike since June. Less supportive of a rebound in the South African currency was the unrelenting decline in commodity prices. Specifically imperative for exchange rates with the rand is gold, of which South Africa is the largest producer in the world. Prices for the precious metal have dropped 9.7 percent in the past week alone, which is currently 20 percent lower than its peak $732 per troy ounce reached on May 12th on the New York Mercantile Exchange. The sharp contraction over this past week was spurred by possible negotiations between Iran and the UN Security Council and predictions of lower demand from jewelers. The ongoing standoff between Iran and the UN over the formers research in nuclear technology for supposedly militaristic ambitions was one of the key drivers behind a rally in oil and gold. However, as Irans top negotiator Ali Larijani steps to the table with a promise of halting research for two to three months in exchange for promises the country would not be attacked, both commodities will further loose their risk premium. So far, the rand has held its own during the decline, but should gold prices begin to creep back up, a full-blown retracment in the USDZAR could evolve.
The few indicator released over this past week have lent little strength to rand as the USDZAR has come within stones through of the high set in late-June. Measures of the nations reserves through August were absorbed for clues that the central bank may find an alternative method for balancing the trade account while putting off potential rate hikes in the process. According to the statistics, the International Liquidity Position, or net reserves grew to a recent record $20.95 billion rand. Gross reserves also grew to $24.44 billion rand. While both of these measures suggest an active role by the central bank to rope in the current account deficit, the market is still heavily positioned that it wont preclude another rate hike. Despite the undoubting resolve of rand bulls, the pair continued to rise for the day. The next economic release from South Africa didnt print until Tuesday, September 12th, but a short-term high in the USDZAR was already in place. Just the day before, the pair had found a short-term top at 7.4810, just a short ways from the 7.5350 high set on June 23rd. This high was needed after it was reported that factory production in July unexpectedly cooled. Activity for the month slowed 0.7 percent from June as higher energy prices and the first rate hike from the Reserve Bank in three years curbed spending. Looking ahead to the August read, market participants were already weighing the cumulative effects of a sharp drop in crude and an 18 percent easing in the rand to counter an additional rate hike to a two-and-a-half year high 8.0 percent. The predictions were promising as the USDZAR pushed lower for the second consecutive session. The final read offered for the week came from the Rand Merchant Banks third quarter survey of business confidence. With the outlook came a boost in firm leaders optimism from 82.0 set in the second quarter to 85.0. Greater levels of optimism are subsisting on predictions that the 21-year record pace of growth last year would translate to uninterrupted spending trends from consumers even as higher interest rates cut into profit potential.
Technical: The USDZAR made a double top (albeit a bit lower than the previous top) on 9/11 at 7.4800 with the 6/23 high at 7.5351. Also, the 6.7050-7.4800 rally appears to be in a full 5 waves which favors a corrective move lower. Fibo support begins at the 38.2% of 6.7050-7.4800 at 7.1858. Reinforcing the call for a corrective move lower is that MACD slope turned negative yesterday (daily). A push above the 9/11 high at 7.4800 exposes 7.5343.
