08 Mar Could the latest strengthening of the Rand have been anticipated?

The above screen shot reflecting an ongoing strengthening trend of the ZAR against the US$ during the period from mid November 2017 through to the last week of February 2018 bears some reflection.

The screenshot is a Daily chart of the USDZAR.

Let us take as a starting point for our exercise the rate as it stood on 20 November 2017 when our chart indicated with a Red Down Arrow that traders could expect a strengthening trend for the ZAR and compare it to the rate on 24 January 2018 when our chart indicated by means of a Red Dot that in all likelihood this trend had run out of steam. (Red Dots indicate the mathematical optimal points in down trends.)

The exchange rate for this currency pairing stood at R13,99 to the US$ at the beginning of the period in question and ended at R12,02 to the US$ at the end of it. This quantifies to a strengthening of 14%. There were a number of peaks and valleys during this time, but the overall trend was a strengthening one.

What we have to bear in mind is that there were a number of significant events that could have (and possibly did) cause great uncertainty amongst forex traders about the sustainability of this trend and therefore their ability to know the optimum time to trade. Many companies and other forex investors took the decision to trade their dollars on the basis of this stronger ZAR based on fear of losses or diminished profits.

The most significant contributor to the uncertainty, from a South African perspective, was the multi faceted political cocktail in which we found ourselves during this time. We need not go into all the detail of that because there was a myriad of different elements to it that had an impact on our economy both nationally and internationally. Uncertainty was like a banner over our land.

The run-up to the ANC’s 54th national conference and then the event itself in December 2017 was possibly the main ingredient to this recipe of uncertainty. It was like being on a roller coaster ride. At times there was much hope that at last we would see the end of 9 years of corrupt governance, state capture and credit downgrades. At other times there was the concern that nothing substantial would change and that the Zuma dynasty would continue in just another shape.

The election of Cyril Ramaphosa as ANC president was a significant turning point for the good and gave an impetus to the strengthening of the ZAR. But the uncertainty was still not over because he presided over a split National Executive Committee and we had two centres of power, nobody knowing how the chips would fall.

All of this could only be the breeding ground for uncertainty with regard to the timing question in the forex equation.

Internationally too there was much cause for volatility.

Germany was facing an ongoing potential impasse in government with Angela Merkel not being able to nail down a coalition government, the Brexit uncertainty in the UK and its effect on the stability of the whole of the European Union, the USA’s changing face in world matters coupled with Donald Trump’s belligerent posturing towards North Korea and Iran, Vladimir Putin’s expansionistic agenda as well as China’s similar world power aspirations.

All of this sounds quite dark, but then it is a mini-reflection of the world in which we found ourselves during this period under review with its resultant impact on economies and therefore on exchange rates of currencies.

We must therefore see that there were so many very real happenings in South Africa and the rest of the world that had an influence on the performance of the ZAR against the US$ during the period between 20 November 2017 and 24 January 2018. Who would want to be led by all this uncertainty and hence by emotions of fear (or greed) when you have to decide when to exchange?

Fear and greed cloud human logic, and if we reacted solely based on these we would have found ourselves smack in the centre of the herd of sheep running towards the cliff. And that is Ba-a-a-a-a-d. We would simply be feeling and trading like every other emotional trader out there.

A mechanical model, based on mathematical algorithms such as ours, successfully enabled our clients to do their trades at the optimum time, in other words when the steam ran out of the ZAR’s strengthening trend.
We know it is not always easy to follow the indicators  Especially while everything in you is shouting the exact opposite of what the arrows and dots are showing.  But in the long run it is the mathematical edge that makes all the difference.

You can either THINK what the markets will be doing based on all the news, or you can LOOK at what it is actually doing and then align yourself with the most probable future direction based on knowable patterns.

A question that we feel all forex traders should ask of themselves is “how did our interpretation of the market during this period compare to that of our algorithm?”

All the best with your trading!

Regards,
Pieter-Francois Theron