Currency Currents - Your worst enemy isn't the rand

For any South African
business, but especially
importers and exporters,
probably your most critical
factor is the exchange rate.
Why is that?
Firstly, the rand
(unfortunately for us) is
one of the most volatile
currencies around – as we have
experienced in recent months.
And secondly, because the
average person, in fact more
than 80% of people, get it
wrong – time and time again.
We tend to sell when we
should be buying (through
fear and panic), and we tend to
buy when we should be selling
(through hope and greed).
When the rand has been on
a weakening trend, exporters
tend to become complacent,
confident that this weakening
trend will continue in their
favour, and thus do not hedge.
And importers become
more and more fearful that
the unfavourable trend will
continue, and so they hedge.
Conversely, when the rand
has been strengthening,
importers become complacent,
confident that the rand
will continue stronger
(and therefore don’t hedge
themselves), while exporters
are fearful of further strength
and so they hedge.
But markets never move in
one direction forever – they
trend and counter trend in
larger and smaller degrees.
These movements are the
result of human activity in
that market. And it is wellestablished
that 90% of our
decisions are emotionally
based, and we then rationalise
them with logic. Nowhere
is this more so than in
financial markets where such
uncertainty prevails.
What this means is that a
chart of the rand is actually a
chart of the mass sentiment in
that market at any time, which
drives it from one extreme of
hope or fear to the other in
various degrees.
As a result, what you find
is that, at market extremes
(when a change in trend
is ripe), the emotions of
people in that market have
reached extremes, with fear
turning to panic, despair and
capitulation, and complacency
and hope turning to overconfidence
and outright greed.
And these emotions result
in you doing exactly the
opposite of what you should
be doing at these extremes –
buying when you should be
selling, hedging when you
shouldn’t, and not hedging
when you should.
The fact is that your
emotions are your worst
enemy when it comes to your
rand exchange transactions
– they play havoc with your
rational thinking,
It is therefore imperative
that you not only understand
the market we are trading in,
but more importantly that you
understand yourself.
And then, that you have a
strategy to counteract these
natural tendencies – one
that gives you an objective
perspective of where the
market is positioned within
its various degrees of trend,
giving you a framework that
enables you to make rational,
informed decisions – instead
of irrational emotional ones.
Without this, you will
default back to listening to
your worst enemy – and living
with the regrets.
For more info on the rand
and where it is headed, see
www.ForexForecasts.co.za/go/
Extreme Rand Negative Sentiment ZAROutlook.
CAPTION
James Paynter is the head market
analyst at Dynamic Outcomes