Dear Investment Academy Reader,

Can you believe it?

It’s over!

After six years of intense preparation and the most inspiring (and exciting) month in years, the World Cup’s finally over. And I’m sure, like me, you have no idea how you’re going to spend your evenings now that you’re not glued to the TV every night.

But that’s not the only thing worrying me.

For months, market watchers have warned that the rand would become even more volatile as World Cup euphoria ebbs away. And now that we’re facing this very real reality you need to know exactly what’s coming around the bend.

So today, I’ve asked global currency guru, Evaldo Albuquerque, to fill you in on what lies in store for the rand.

Here’s to your financial freedom,

Karin Iten
For the Investment Academy

The World Cup has come to an end. As a native Brazilian, I have to admit I’m really disappointed. Brazil didn’t make it too far in the competition.

But hopefully everything will work out in the next World Cup, when they will be playing at home.

Plenty of currency traders were also disappointed by the World Cup, but for a different reason. They all believed the South African rand would shoot higher because the country was hosting this major event.

But the World Cup didn’t have any positive impact on the local currency at all. The South African rand still suffered right along with all the other “risky” currencies in the market recently.

And the rand isn’t going to be rising any time soon either.

With so many signs pointing to a slowdown in global growth, there’s more room for the rand to drop in value vs. the dollar. This means the USD/ZAR is about to rise (the dollar will rally while the rand falls).

In fact, there are several forces in place practically guaranteeing that will happen…

As copper goes, so goes the rand

South Africa is a country rich in minerals, so commodities have a big influence over local assets, such as the currency. That’s why before trading the rand, I always like to look at how commodities are performing.

More specifically, I like to follow copper because that’s one commodity that has a strong correlation with the South African rand. And the performance of copper has been very poor recently.

The chart below shows the daily chart of copper with two major simple moving averages (SMA). The chart shows what’s known as the death cross, which forms when the 50-day SMA crosses below the 200 day SMA.

Death cross predicts a bear market for copper

 
And there’s one more big reason to believe copper’s downtrend will continue: China is cooling its residential property market. If you don’t need to build houses, you don’t need as many wires, pipes, etc. That will drag the price of copper lower.

The chart below shows the Shanghai Property Index of Chinese developer stocks. This index includes 34 real-estate companies traded in Shanghai.

As you can see in the chart, the index has predicted copper’s moves since 2007. When the index moved, copper wasn’t far behind. Now the property index is once again predicting more downside risk for copper.

Chinese real estate rends to predict copper’s next move

 

The relationship between copper and the Chinese property market is pretty clear to me. What few traders/investors realise is that they can profit from this development by playing the currency market.

As I mentioned before, the South African rand tends to follow the price of copper.

But timing is critical when trading the pair USD/ZAR...

Trading the rand isn’t as easy as it sounds

Timing is critical when trading the rand.

With unemployment over 20%, the domestic economy is looking very weak. Last week, the governor of South African Reserve Bank (SARB) said the recovery in South Africa is still fragile, and mentioned there’s still a decline in manufacturing activity.

The governor also warned that the initial recovery seen in South Africa would be unable to continue with the current sluggish demand recovery.

After hearing that, I know it’s very likely that the central bank will cut rates once again to stimulate the economy. Should the central bank cut rates; traders will immediately sell the rand once more (or buy the USD/ZAR pair).

But trading the USD/ZAR can be tricky.

Although the fundamentals are weak, the rand still attracts a lot of capital because of its relatively high yield of 6.5%. Even at 6%, traders would still use the rand as a carry trade (they buy the high-yielding rand for its high yield, and then sell off another lower-yielding asset).
As you can see in the weekly chart below, the rand has been trading in a range for a while now.

Notice that the level around 8.0 remains an important resistance. It would take a significant decline in commodity prices for the pair USD/ZAR to break through it.

Weekly chart of USD/ZAR shows both potential and limited risk

But in today’s scenario of increasing risk of deflation, that’s a real possibility. Notice that there’s a lot of upside potential for the pair USD/ZAR.

Overall, I would look to buy the pair USD/ZAR on dips. I just feel this is a great trade from risk reward perspective, with a lot of upside potential, but limited downside risk.

But don’t forget: Trading the rand is very tricky. To do it right, you need professional help.

Happy trading,

Evaldo Albuquerque
For the Investment Academy