Pound-to-South-African-Rand Rate in the Week Ahead: New Uptrend Takes Hold

© Adobe Stock

- Rand slips as GBP accelerates, creating GBP/ZAR uptrend.

- Break of trendline supports bullish outlook for GBP/ZAR rate. 

- Brexit to drive GBP as Moody's rating review looms over the ZAR.

The Pound-to-South-African-Rand rate has reversed its previous downtrend and is now poised to extend its recent gains.

GBP/ZAR broke through a key trendline last week, climbing from an opening level of 18.37 to close up at 19.34 on Friday. The short-term trend is now upward and likely to remain so.

Above: Pound-to-Rand rate shown at daily intervals.

We forecast the GBP/ZAR rate will climb to 19.81 once it has overcame the current 19.60 high. The target is based on the length of the upmove immediately prior to trendline (a) extrapolated by 100% above (b).

A more conservative target of a 61.8% extrapolation has already been met. The recent move higher came despite the market showing signs it was at the start of a broader downtrend.

Increasing hopes the U.K. and EU are close to a deal on the terms of the former's departure from the bloc were behind last week's shift in the Pound-to-Rand rate. 

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

The SA Rand: What to Watch

The Rand weakened significantly last week as multiple external factors colluded to drive the currency lower.

These factors included a strengthening of the U.S. Dollar, concerns over Chinese economic growth and market jitters over political stability in the Eurozone. It remains to be seen whether the same cocktail weakens the currency this week.

On the data front, however, the main event is the review of South Africa's credit rating by Moody's, the outcome of which will be announced on Friday, October 12.

The main fear is that Moody's could downgrade SA's local currency credit rating to "junk" status. If this happens the country's government bonds will be excluded from the Citi World Government Bond Index (WGBI), which would stoke capital outflows and see the Rand depreciate significantly.

The review does not come at a good time for Sotuh Africa, which is struggling with subdued growth and needs investment capital to stoke a recovery.

President Ramaphosa recently unveiled a fiscal stimulus programme to help boost growth but most of the funds will be diverted from other areas so, although the programme probably won't pose a risk to the country's credit rating, there are questions around just how effective it will be. 

Zaakirah Ismail, fixed income and currency strategist at Standard Bank, says a downgrade is unlikely because the new stimulus programme will not involve extra borrowing and the country's financial accounts look reasonably stable.

"The latest tax revenue data (up to August) still not does reflect material tax revenue underperformance. We, therefore, believe that fiscal underspending, particularly on infrastructure, will counter a revenue shortfall, and so we expect an unchanged rating and outlook at the upcoming Moody’s review," Ismail writes, in a note to clients.

Other data scheduled for release includes business confidence in September, out on Wednesday at 10.30 London time, as well as gold production data due on Thursday at the same time.

Economists forecast that gold production will have fallen -4.0% during the recent month and that manufacturing production will have declined -0.3%.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

The Pound: What to Watch this Week

All eyes now turn to a meeting of European leaders at a dinner on October 17 when they review the state of negotiations with the U.K. ahead of the October European Council summit commencing on October 18.

"In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal," European Council President Donald Tusk said at the Salzburg informal summit.

Expect market nerves to remain piqued over the next week as headlines, rumours, optimism and disappointment create an unstable environment for traders to navigate.

"Brexit remains the key driver for the GBP and uncertainty related to the outcome is likely to keep the GBP volatile," says Mikael Olai Milhøj, a foreign exchange strategist with Danske Bank.

The president of the European Commission, Jean-Claude Juncker, has meanwhile said on the weekend he is sure a Brexit agreement could be reached in November, if not sooner.

Jean-Claude Juncker told three Austrian newspapers that Brexit without a deal "would not be good for the UK, as it is for the rest of the union".

He added:

"I assume that we will reach agreement on the terms of the withdrawal agreement. We also need to agree on a political statement that accompanies this withdrawal agreement - we are not that far yet. I have reason to think that the rapprochement potential between both sides has increased in recent days, but it can not be foreseen whether we will finish in October. If not, we'll do it in November."

At the moment there appears to be a lot of support for a Canada +++ arrangement even from within Theresa May's Conservative party, so if the proposal is broadly well received, it could be a big moment for negotiations and a concomitant rise in GBP. Of course, the risk of a rejection is also quite high, and, therefore, a fall in GBP.

The question of the Irish border remains a sticking point but the UK has said it will propose a solution in the week ahead so there may be movement from news about that too.

On the data front, the main release is probably going to be GDP data, which is forecast to show a 0.1% rise in August, when it is released at 9.30 B.S.T on Wednesday. In July GDP rose 0.3%. A higher than expected result would help GBP.

"Things are looking rosier for the third quarter and there should be more evidence of this from the monthly GDP estimates due on Wednesday. UK GDP is expected to have expanded by 0.1% m/m in August, to produce an annual figure of 1.5%," says a preview from FX broker XM.com. "On a 3-month basis, growth is forecast at 0.6%, which would match July’s rate and point to growth of a similar amount for the third quarter."

Another major release for the Pound is likely to be the trade balance in August, which is expected to show a -10.9bn deficit when it is released at the same time on Wednesday.

Industrial and manufacturing production are also out at the same time and are both forecast to show a 0.1% in August compared to the previous month.

Finally, the Royal Institute of Chartered Surveyors (RICS) house price balance is out just after midnight on Thursday morning and the retails sales monitor for September is released by the Consortium of British Industry (CBI) just after midnight on Tuesday morning.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here