Updated: Mar 28, 2021
The rise in commodity prices for a country like South Africa is great. The country exports various precious metals, raw materials and commodities that global manufactures use. This rise in commodity price means South African companies can potentially profit more on their sales.
However, as mentioned by officials the South African economy is "dangerously overstretched". - Financial Times.
Could this mean the ZAR strength is going to be put on hold? Let's find out in the rest of the analysis.
Fundamental analysis overview - Bullish
Macro Currency Strength Meter - Bullish
GDP Growth Rate Differentials - Bearish
Import/ Export Analysis - Bullish
Stock Market analysis - Bullish
Interest Rate Differentials - Bearish
Hedge Fund Positioning - Neutral
Price (Technical Analysis) - Bullish
Overall, EURZAR looks like a great bullish idea for the watchlist.
Currency Strength Meter Analysis
Starting off the analysis with the one and only best currency strength meter in the forex industry.
It's calculated by crawling thousands of economic reports for over 23 different economies and then running them through a clever algorithm to determine currency strength based on future economic growth or contraction.
Making fundamental analysis accessible, and fast for its users.
What we've identified is that there's a really strong economic bullish trend for the Euro over the past 2 months nearly. This could explain the strengthening euro across most euro pairs.
On the flip side recently this week we've seen the ZAR start to weaken heading into the negative economic scoring of the currency strength meter.
This deviation is a potentially strong sign of a EURZAR bullish move in the making...
GDP Growth Rate Differentials
The GDP growth rate differentials on the other hand are looking very slightly bearish.
The change in GDP differential shows that next year South Africa is expected to grow slightly more by 0.1% in comparison to Europe. However, for the rest of this year Europe is meant to take the lead.
So, for now keep an eye on the GDP growth rate indicator to see if there are any changes in IMF forecasts. What we're expecting are bullish signs in favour of Europe as more data is released.
Import/ Export Analysis
Gold as everyone knows is one of South Africa's major commodity that's mined in the country. We analysed over the past 10 years that Gold has a 10% correlation with EURZAR meaning there's a positive relationship with the two.
E.g. as Gold goes up EURZAR tends to follow.
Gold grows on average growth over the past 10+ years for gold has been just under 1% with this month falling by 0.5% since Feb. This slight contraction of price in gold could see EURZAR follow suit.
Important to keep an eye on gold prices moving forward with the idea as any bullish moves will be seen as a potential long side move in EURZAR.
Volkswagen is one of Europe's largest car manufacturers but also South Africa being a major exporter in cars it makes sense to include one here.
Despite the negative growth that came in March 2020, Volkswagen has surpassed expectations nearly double in price since the pandemic.
This positive growth followed by a positive correlation of just under 40%means we could be seeing the long term EURZAR move in fruition.
Putting the data into perspective on average VW grows by about 1.3%, this months growth rates were over 18%.
This is just over a 2 standard deviation which is extremely volatile and outside the normal growth boundaries.
Finally, an interesting commodity we've included in the analysis is Iron ore.
According to the OECD Iron ore is still a major commodity and raw material that is mined and exported from South Africa. So it makes complete sense to include it in the analysis...
After taking a look at the data, the past 10 years correlation equates to -51%.
This is an insanely strong indicator as it's saying that over 50% of the time as Iron ore prices increase, EURZAR falls and vice versa.
You can see clearly Iron ore prices have been rocketing over the past few years.
The most recent data however is showing a small increase in Iron ore prices meaning a slightly bearish outlook on EURZAR.
Overall, the data is in very grey areas with both Iron ore and Gold changes being an important indicator to keep your eyes on. Any changes that will be bullish in favour will give us greater confidence in a upside move.
Domestic Stock Market Analysis
The stock market is another key indicator we need to analyse to gauge relative wealth across the economies mentioned.
What we've highlighted here is the Euro Stoxx 600 which include hundreds of Europe's public companies, this index is a great sign of wealth in Europe.
We then priced this index in ZAR to check relatively if Europe is looking stronger or weaker in comparison.
Euro Stoxx 600 priced in ZAR has shown huge price movements now higher than pre-pandemic levels.
This is a massive bullish sign that we may be in for a reversal of EURZAR to start up trending again.
Interest Rate Differentials Analysis
The interest rate differentials are a great indicator for hot money flow.
Simply, as investors hold assets in a base currency the interest rates are potential gains they can make for doing so.
A disappointing variable in the analysis here is that the net interest rate differentials are negative in favour of South Africa.
This is one of the main indicators that contradicts our hypothesis.
Hedge Fund Positioning - COT Report Analysis
The Commitment of Traders COT Report is one of the key volume indicators in the markets.
It tells us what the big boys are doing.
We've created a COT indicator to track hedge fund sentiment in the markets so we know when we should be trading with them and not against them.
Currently the indicator is showing there's a neutral bias for hedge fund sentiment which is why our overall sentiment is neutral in the summary.
Price Analysis (Technicals)
The price chart for EURZAR has been in a clear up trend for years.
We've recently seen it dip with commodity prices sky rocketing and increasing the value of the ZAR.
It's now reached a level of support which has seen resistance and some buying power.
Here is where we'd like to see signs of buying.
However, I personally like to just see if the past couple weeks to a month has been growing or not.
Most this analysis was done using a Global Macro Strategy approach so if you want to learn a bit more on that side watch out free introductory class.
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