South African Rand: Japanese Traders Lead Exit From Dysfunctional ZAR Market

The South African Rand slumped as low as 25.9102 against the pound on Monday the 12th following a flash crash.

Trading providers IG said they believe the sudden collapse in the ZAR complex was due to low volumes and the decision by a Japanese bank to shed some of its ZAR exposure.

"I'm being told by a bank that this has been driven by a liquidation of ZAR by Japan retial in thin liquidity," says Chris Weston at IG.

“In the early hours of Monday morning during illiquid trading conditions, the ZAR weakened sharply (9%) to a new all-time low of 17.91/USD as yield-hungry Japanese retail investors decided to cut their ZAR positions,” says a note from Barclays.

Any unusual move in the market is exacerbated when volumes are thin - the price typically moves further than would be the case had there been more participants in the market. The Japanese bank did nothing wrong - instead it appears the SA rand market is not working as it should.

"Local markets are still trying to absorb what is now being called the 'flash crash' - yesterday morning’s extreme moves in the rand - the second in four months. Market sentiment has been one of shock and this seems to have filtered into thin trade and we all wait and see where things are going," says John Cairns of RMB Bank.

"Exaggerated moves match those back in August when USD/ZAR hit 14.00 for the first time this cycle, driven reportedly by some computer trades early in the morning," continues Cairns, "the SARB responded to those moves with a statement suggesting they were prepared to stabilise the market. It will be interesting to see what they do this time around."

If the recent declines were technical in nature then surely the currency should recover?

Not so argues Cairns:

"Given that yesterday’s moves were clearly abnormal, a case could be made that the rand should go back to where it started. This seems unlikely. Sentiment, already so poor, has been hit hard and it seems the rand will hold on to at least 3% losses."

Latest Pound / SA Rand Exchange Rates

	Live: 22.6363▼ -0.07% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.8667 - 21.9572
**Independent Specialist	22.3194 - 22.41 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Where there is Smoke...

Flash crash or not, the rand is vulnerable.

A mixture of weak fundamentals and rising inflation have created a difficult to solve conundrum for the South African Reserve Bank.

If it raises interest rates to combat the inflation it runs the risks of stifling fragile growth.

If it keeps interest rates low, inflation could rise even higher and the rand will continue to devalue at a pace.

One possibility is that the central bank could intervene directly as several other central banks including the RBNZ, SNB and ECB have down recently.

The next meeting of the SARB is on January 28th and it may be the focus of intense speculation if the bank does not move before then.

Analysts at Standard Bank said the rand’s uncontrolled depreciation may cause the Reserve Bank to raise rates by 50 basis points at its next meeting:

“It is hard to see the rand pull back on a sustainable basis,” the Standard Bank analysts said. “In recent weeks we have seen South Africa’s real effective exchange rate fall sharply to levels last seen in 2001 and 2008.

“We note that in both 2001 and 2008, amid a rand slide, the South African Reserve Bank embarked on a fairly aggressive rate hiking cycle.”

Technical Forecasts

The charts are showing a continuation of the dominant up-trend higher. 

This trend is expected to continue, with confirmation of further upside resulting from the exchange rate definitively breaking above the R1 monthly pivot at 24.3315, by moving above 24.6000, which would signal; a continuation higher.

Such a break would then be expected to open the way up to the 25.0000 level, which may provide interim support given its significance as a psychologically significant round number.

The up-trend is solid, except momentum which is overbought, however this can happen for extended periods in up-trend.
Ideally traders should wait until momentum moves out of overbought territory before buying again.