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Friday February 5, 2010 - 15:52:51 GMT
Black Swan Capital - www.blackswantrading.com

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A vulnerable currency – The South African Rand?

Quotable  
"No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?"
           - George Orwell, Animal Farm, Ch. 5
 
FX Trading –  A vulnerable currency – The South African Rand?
 
To the global media, South Africa is presented as a multi-cultural success story it seems.  To me, the country appears about two-clicks away from major turmoil. So instead of a leisurely walk on the way to becoming the next Zimbabwe, my view is the country may soon break out into a brisk jog along that path.  
 
The four C’s plaguing South Africa: Crime, Corruption, Competency, and Communism
 
Note: The following piece was sent to us by one of the brain-drain victims who left South Africa; he hates what he sees happening to his country.  It is a piece that summarizes the incredible problems of crime and corruption blanketing the country. Sadly for all who live there, it seems to be getting worse instead of better.  If you are at all squeamish, or have an angelic view of South Africa as the “multi-cultural success story,” we recommend you not read this piece.  Click here to view. 
 
The two C’s and one S supporting South Africa: China, Commodities, and Soccer playing a supporting role
 
Currency traders have looked past that political risks; there have been reasons for that:
 
1) The commodities bull market is part and parcel to what South Africa does; being a hugely mineral rich depository.  
2) Big positive yield differential for South Africa has attracted hot money flow to the country; South Africa 3-month yields are still at a whopping 7.1%.  
3) Though we haven’t seen specific numbers, the infrastructure build for the up and coming World Cup soccer match has likely created a decent number of jobs and amount of foreign investment. (Good luck to those who attend those matches in Johannesburg; a Kevlar vest under your favorite team jersey is suggested.)   [Chart not available in text format.]
 
The rand appreciated 51% from its low in October 2008 to its high in early Jan 2010 against the US dollar; the CRB index low to high appreciation was 44%. 
 
High yields, coupled  with a rising currency, backed by rising commodities prices since the credit crunch created a virtuous self-reinforcing circle for the currency.  That may be coming to an end.
 
What’s the catalyst for a big change in trend?  Well, the same catalysts that will damage all other commodity currencies—stagnant global demand from the top industrialized nations—the US, Eurozone countries, and Japan; coupled with some type of break in the Chinese credit bubble. If we get that, we expect the rand’s fall from grace to dwarf falls in the other commodity currencies against the US dollar.  
 
Another bout of recession—trigged by the scenario above—will ensure the African National Congress will never be able to deliver on the huge promises it made to its rank and file during the last election—the one that launched Mr. Jacob Zuma into the role of Presidency. A rank and file that is increasingly rumbling for real reform; anyone stuck in their horrible living conditions would be rumbling too.  
 
It’s not exactly going out on a limb to suggest Mr. Zuma will fall back onto his communist roots, imperiling the already sketchy South Africa’s fiscal situation, leading to more de-industrialization, hiking up the police state mentality, and further ramping up corruption (which is a special gift of communism as the wise elders of the nomenklatura direct resource allocation) within the country.  

Heck!  The same thing is happening in all the Western nations that are supposed to have some faith in the market.  The swing to collectivism is strong everywhere.  It is especially dangerous and unfortunately the most likely path for South Africa.  
 
Bottom line:  There is a growing probability a vicious self-reinforcing will engulf the South African rand; if so, it’s a currency that has a long way to fall.  [Chart not available in text format.]

You read that correctly—that is a $100 trillion dollar banknote issued by the Zimbabwe government.   Yikes! 
 
Happy Friday!  Have a great weekend. 
 
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com 
 
David Newman here …
 
Jack and I would like to apologize again for the failed Introductory Currency Trading webinar we planned, and you registered for, yesterday. Jack, lacking the proper techie skills to say the least, could not get his audio to work. He will be recording the webinar no later than this weekend and we will make a copy available to all readers of Currency Currents readers. 
 
Our Members are continuing to rack up nice gains in our PositionTrader FX service. If you haven’t tried it, and you are looking for an actionable way to play currencies based on both a fundamental and technical view, I urge you to give us a try. 
 
Have a great weekend. We will be back at you on Monday…
 
Take care.
 
David Newman
Director of Sales & Marketing
dnewman@blackswantrading.com

P.S. As always, this newsletter comes with our 30-day money back guarantee if you determine for any reason it’s not right for you. 

 

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