Pound to South African Rand Rate Outlook: Chart Biased Towards Further Upside

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Such has been the strength of the surge in sterling versus the rand, momentum is likely to extend the trend to the upside for now.

The GBP/ZAR pair has risen strongly since bottoming at the April 20 lows, at 20.35. 

The steepness of the rise indicates that the pair will probably continue higher.

The break above the 22.8790 highs established a higher high, and therefore signalled a potential change in the short or medium term trend from down to up.

On balance the exchange rate will probably climb higher towards the next target at the 23.5000 level, where the R1 monthly pivot is situated, as prices often stall at the level of monthly pivots.

GBPZARMay23

 Officials Overoptimistic about Growth, Say Barcap

A mixture of political uncertainty and the likelihood of more interest rate rises from the South African Reserve Bank (SARB) is likely to keep the rand under pressure, and support more upside potential in the pair, according to the view of analysts at Barclays and Rand Merchant Bank (RMB).

The rand has already weakened further on the news that the high court ruled on Monday May 23, that the decision to drop charges of corruption against the country’s President Jacob Zuma was wrong. The charges were originally dropped a month before he became president. Zuma and the Public Prosecutor are in the process of appealing against the judgment.

Markets were surprised when the SARB decided to keep rates unchanged at 7.0% at their recent meeting, as Barclays Capital, amongst others had expected a 0.25% rise. According to RMB’s John Cairns, the accompanying statement was worded such that it kept alive the possibility of more hikes in the future:

“While the SARB kept rates unchanged yesterday, their statement was hawkish enough to keep the door wide open for further hikes.

There is a risk that they act in July and we think it will take a meeting or two yet for the SARB to convincingly signal the end of the cycle. We remain of the view that rates will start being cut from next year.” John Cairns.

Barclay’s Peter Worthington and his team, think that the SARB is being overly optimistic in its forecasts for substantially higher inflation in 2017, on the back of increased economic growth, and higher energy and commodity price pass-through.

Nevertheless, in their forecasts for 2016 Barclays are similar to SARB and their base case is for a July rate rise, followed by another rise in November.

The rand may be at risk, however, if expectations about inflation fall more in line with Barclays, rather than the SARB. There may also be further pressure from the separate political issue of the Finance Minister Gordhan, who continues to be threatened with charges from the country’s internal investigation agency the ‘Hawks’ on charges he illegally set up and authorised a special unit to spy on taxpayers when he was head of the Tax Commission.

The currency is still at risk from a potential shock should Gordhan lose his position as he is considered a competent operator.

Moody’s has already warned South Africa it is close to losing institutional rating, which would mean its bonds would be reduced to the status of junk debt and would not meet the criteria of many fund’s allowable holdings.