Updated: Aug 2
Logikfx- Forex Macro Currency Strength Meter
This week’s fundamental forex analysis we’re going over a potential continued uptrend in the EURZAR forex pair. The exchange rate has been on an uptrend for many years now with the ZAR continuing to hold a weaker currency against the rest of the world. Many forex traders will understand that this is classed as an “exotic” currency pair. However, when you have a system and structure that works, those terms don’t mean anything. The volatility on this currency pair has the potential to make great gains compared to less volatile assets, assuming an opportunity arises.
The fundamental forex forecast always starts off with our “Macro Currency Strength Meter” to determine the domestic fundamental strength of the currencies. This is a great starting point to identify what forex currency pairs to trade. Once we’ve identified it, we can focus our attention and time to analyse it thoroughly.
The Macro Currency Strength Meter showed some interesting signs this week. Although both currencies were looking weak, since 04/07/2020 the Euro has started to pick up gaining over 50 points during the week. Economic reports suggesting the impact of COVID-19 is now starting to ease and countries now opening back up towards tourism will be a great boost towards the economies GDP in Europe. The positive fundamentals with ZAR fundamentals continuing to look weak may create an opportunity on a largely trending movement.
We’ve created an overall score of +43 for the Euro and -45 for the ZAR, overall giving us a fundamental long bias on the currency pair over the next couple months. Considering the potential second wave of corona virus this is a plausible idea and we’ll get into why.
Similar to our other EUR analysis we’ve chosen to include various car manufacturers in our export/ important trade analysis. One reason being car manufacturers are a huge contributor towards euro area GDP, another, South Africa has close ties with various European car manufacturers.
“According to the National Association of Automobile Manufacturers of South Africa (Naamsa), the motor industry contributes 6,8% to the country’s gross domestic product (GDP) – 4,3% manufacturing and 2,5% retail. In 2019 a record number of 387 125 vehicles were exported from South Africa to other countries (351 139 in 2018). A record number of 631 983 vehicles were manufactured in South Africa in 2019. These vehicles and parts made in South Africa are exported to 155 markets.” 
The reason we’ve chosen to include BMW in the forex analysis is because at the end of 2015, BMW announced they were going to nor produce the new generation BMW X3 in South Africa.
“More than 85% of all BMW X3 vehicles manufactured at the Rosslyn plant is destined for BMW markets in the US, Taiwan, Japan, Singapore, New Zealand, Hong Kong, Australia, Sub-Saharan Africa and Canada.” 
This is similar to why we also included the Volkswagen in the forex analysis as the car manufacturer has chosen to move production abroad.
Volkswagen has been manufacturing several Polo models for almost 24 years. The current Polo has been in production since 2018. This is one of Volkswagen’s most popular vehicles in western markets especially in Europe and domestically.
The total production in 2019 was 200,000 where 153,582 were exported and 46,418 were destined for the local market. Since 1994, Volkswagen has produced more than 1 053 600 vehicles for the export market. So, it just goes to show South Africa are no longer just known for their natural resources and mining industry, but their production is also picking up.
Enough about cars, moving onto the Gross Domestic Product (GDP) differentials between the euro area and South Africa. The blue line represents the GDP differentials between EUR and ZAR and the orange is the EURZAR exchange rate. The two only have a 16% correlation which is understandable since GDP is a lagging indicator in general.
The interesting relationship we can see overall is that as the EURZAR exchange rate increases the GDP similarly increases. There are a few interesting extreme points in the data. When the spread GDP differentials hit a -4% differential it tends to bounce back and start to increase. On the flip side when it reaches a positive 2% it tends to decrease. This has shown to be true over the past 17 years.
Recently the data has shown a negative differential of -3%, however in the Q2 of 2021 this is expected to increase to over 8% with the Euro area taking charge. This may mean in the current state we might see a retracement in EURZAR falling in value in the short term but in the long term we may see the uptrend continue.
The EURZAR against BMW is a very interesting correlation. We’ve seen the data since 2003 have a 63% positive correlation. This is a great factor to include as discussed earlier and the data even shows it. Since last month we’ve seen a 3% increase in BMW stock prices which could potentially equate to the EURZAR also appreciating in the future. This is a main reason why we’ve scored it a slightly long bias.
EURZAR against the Volkswagen share price also shows similar correlations. You can almost see a mirrored outlook against the two assets. However, this time round it has a 53% correlation with similar growth at 2.41% which scores a slightly long bias on our system too. If you look closely to the data as the Volkswagen prices increase so does the EURZAR exchange rate! Recently, the VW prices have hit a support level and global restrictions starting to ease may see VW cars being sold more equating to increased share value and EURZAR appreciating.
If you’ve been a forex trader for a long time, you’ll understand that South Africa are a major exporter of rare minerals and ores. This includes the likes of Gold, Diamonds and Platinum. Gold being the leading export in South Africa. Since it’s a commodity floating currency which is heavily impacted and reliant on a few exports, it means the exchange rate can be volatile to movements in commodity prices. Just like Oils relationship with the likes of Canada.
The Gold prices alone have a 78% positive correlation with EURZAR and it’s a great leading indicator on predicting future exchange rate prices. As you can see from the periods of 2009 and 2011, gold prices increased significantly. The EURZAR exchange rate soon followed. Even between the periods of 2014 to 2020 the charts look very similar which shows the positive correlation in action. We’ve given this a current bias of -1 because recently gold prices have decreased which have also hit a potential level of resistance. This is no surprise due to Gold prices rising during risk off periods. It’s very unlikely gold prices hold at this level as risk off will continue until around 2021 when a vaccine is developed for COVID19, until then businesses will be heavily impacted and supply chains in chaos.
Interest rates have been an interesting topic for EURZAR. Although ZAR has had higher interest rates during its incarnation the differential has been tightening in favour of the EUR. You can see there’s been a solid up trend for over 20 years for the interest rate differentials and as the differentials increase so did EURZAR. Currently, the interest rate differentials have been flattening but at a negligible rate of -0.25% due to ECB rates hitting 0. South Africa will also likely reduce interest rates as their central bank looks to stimulate the economy which will further push the differentials up and potentially the EURZAR exchange rate.
EURZAR against the EURO STOXX50 Europe’s top stock index has a very interesting inverse relationship. You can clearly see when the stock market goes down the exchange rate for EURZAR increases and vice versa. If we’re looking to long EURZAR we’d also expect the EUROSTOXX 50 prices to decrease, as they have been for the last 10 years. It’s really no surprise as currently the major stocks are being lifted up by ECB stimulus and still faltering. If European companies continue to get out classed by global competitors, we will see EURZAR continue its uptrend until we see a bounce bank in EURO STOXX 50.
Here we have the EUR COT data looking very interesting. Hedge funds through 2020 and the end of 2019 have actually been net short open interest for the EURO but over the last few months hedge funds have started to decrease their shorts which has brought net positioning close to zero. Ideally, we want the hedge fund line in grey to increase to a net long open interest which means the grey line is above 0. This would put the markets with our idea so that we’re not trading against the market and we’ll have a much greater probability of the trade working in our favour.
On the flip side hedge funds in grey are seen to have started shorting the ZAR for the past 2 months whereas the interest rate for EURZAR has continued to increase! A great sign for us as forex traders as it potentially means our idea is correct and confirmed by hedge fund positioning. Overall, to be even more confident we’d like EURO hedge fund sentiment to get above 0. So the sentiment analysis overall is neutral until the EURO hedge fund positioning does that.
Just glancing at the EURZAR price charts on a weekly basis we can see since 2017 the currency pair has been in an uptrend. It’s very recently just surpassed it’s high made in 2016 making the ZAR one of the weakest currencies against the EUR to date. Will it continue to increase that is the question as recently that level of resistance has potentially been used as a support level as seen above.
Digging deeper into the lower time frames, on a daily level we can see a clear morning star formation being made in June. This was followed by a potential higher high and now a wedge formation. What we’re really waiting for is a breakout towards the upside of the wedge and the trend line to hold true. This would signal to us that buyers agree that EURZAR will continue to go up in the future. Else we may need to wait for better confirmation signals.
Hopefully all you Logikfx Traders out there found this run down useful.
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