South Africa entering into a technical recession with the COVID-19 pandemic.
Moody’s downgrading SA sovereign credit ratings down to ‘junk’, kicking us out of the World Government Bond Index.
And so, until now, I’ve left the rand to price in this bad news…
Today, I am breaking the silence and sharing with you three reasons why I expect the rand to strengthen over 15% in the next few weeks.
The rand strengthens on the hopes of a quick recovery
Since the announcement came out, in the middle of May, with the national lockdown moving to level three in June, we started seeing signs of rand strength.
As businesses and firms began working on their processes to re-open and operate once again, this built up confidence for people to re-invest in the rand.
Even Annabel Bishop, Chief economist at Investec, said:
"The Rand continues to strengthen as markets are building up optimism for quicker recovery in some key geographic areas, notably some commodity importers, benefiting the commodity nature of the domestic currency"
Is it the rands time to shine against the US dollar?
Take a look at the chart of the US Dollar index (Blue line) versus the South African rand VS the US Dollar (Orange line).
When the rand (ZAR/USD) trend is down, it means the US dollar is outperforming it.
And when the rand trend is up, it means the rand is outperforming the US dollar.
Now, since March we saw the rand underperform the US dollar.
This was when there was an announcement that we’d enter into a full nation-wide lockdown.
Investors instead, moved to other safe haven currencies including the US Dollar and Gold.
But then the tables started to turn.
For the last three months, the US Dollar has been losing its ground. This was most likely due to the dropping in confidence in the economy as we saw, unemployment rates hitting unprecedented levels since the 1930s including.
In April the US unemployment rate was 14.7%.
In May the US unemployment rate was 13.3%.
As South Africa moved down from level five of the lockdown to level three, the rand finally started to strengthen once again.
In the chart above, we can now see the rand is now on a strong trajectory up while the US dollar falls.
I expect this to continue with investors buying the rand once again, due to the positive sentiment and with the gradual re-opening of the economy.
Even, Old Mutual investment strategist, Izak Odendaal agrees and said:
“The rand’s strength is mostly just a shift in global risk appetite, as is normally the case. We have seen global markets rallying quite a bit on the weakness in the dollar,”
This triangle says it all for the South African rand
Looking at the daily chart of the rand (USD/ZAR), the price has dropped in April from a high at R19.00 down to a low at R16.55.
During those three months, the price moved in a reversal breakout pattern known as a ‘Descending Triangle’ (shaded area).
Once the price breaks below R16.55, we will see an influx of sellers in the US dollar against the rand.
This will result in the rand to strengthen even further.
To calculate this target, we’ll simply subtract the low price from the high and low of the triangle.
Price target = Low – (High – Low)
= R16.55 – (R19.15 -R16.55)
This means, we can expect the rand to strengthen to R13.95 (15% move) in the next few weeks.
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Analyst, Red Hot Storm Trader