The Rand and Stock Markets
The South African rand has been one of the biggest losers in recent weeks, in the past month it is down nearly 8% and since the start of the year the rand is down 13%.
A few fundamental factors are weighing on the ZAR:
- Growth fears in South Africa
- A rapidly rising budget deficit
- Another flare up in social unrest in the mining region
- A general dislike for carry currencies like the rand, the AUD, etc.
The last point is of particular concern - the market is ditching risky EM and carry currencies in favour of safe havens like the yen and the CHF. After falling for most of this year, JPYZAR is up more than 10% in the last 2 weeks.
It is not only the yen that has an inverse relationship with the rand, stocks seem to as well.
At the same time as pressure on ZAR has grown, stock markets have come off their highs. We believe there is a link between rising volatility in emerging market FX and the performance of the stock market. The chart below shows 3-month volatility for USDZAR (as measured by the option market) and the Vix volatility index, which measures volatility in the S&P 500. As you can see, volatility in USDZAR has surged and this has coincided with a rise in the Vix. When the Vix spikes stocks tend to sell off, and vice versa.
Source: FOREX.com and Bloomberg
Takeaway: emerging markets are a good reflection of fears that are starting to grip the market. Thus, it is worth watching USDZAR if you trade stocks, since in recent weeks stocks and USDZAR have tended to peak around the same time.
Short term market idea: USDZAR has fallen back from highs above 10.00 in the last two trading sessions; this could help stocks to stage a short term recovery.
Key levels to watch in S&P 500:
- Resistance: 1,645, 1,655, and then 1,675.
- Support: 1,635 - daily pivot, then 1,615,