Usd/Zar: While we are not inclined to recommend any formal position in the pair, we are very attracted to the idea of establishing long positions at current levels, with a potential upside that looks extremely compelling. The market has been in a virtual free fall since early 2009, with the Rand gaining well over 20% against the USD to standout as the best performing currency on the year. However, the USD has now declined back to former longer-term resistance now turned support from August 2007, and with daily and weekly studies looking stretched, we see good reason for some fresh USD buying and Rand profit taking at current levels. Shorter-term price action shows an end to a sequence of 56 consecutive negative daily closes of lower highs and lower lows after the market failed to break lower on Wednesday and has just taken out Wednesday’s highs today. The Rand has also been highly correlated with price action in equities (0.64) and given our view that equities are likely to start to pull back, we see good reason for the Rand to sell-off as well. It seems as though officials have become less optimistic with the recovery prospects for the global economy, instead favoring more of a double dip recovery over a “V” shaped bottom, and any deterioration in investor sentiment resulting from this will ultimately weigh on the emerging market currency. Look for the market to start to carve out a bottom, with a minimum upside extension now seen back towards 8.28, above which should formally shift the overall structure and open a fresh wave of medium-term buying. Any dips back towards the recent 2009 lows at 7.66 and psychological support at 7.50 should be used as an opportunity to build on long positions.

All my best,

Joel