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- South African Rand supported by easing U.S.-China trade tensions
- 17.20 next target followed by 16.60
- Brexit news to drive the Pound; geopolitics the Rand
The Pound-to-South African Rand exchange rate is falling at the start of the new trading week as it extends its established downtrend.
At the time of writing 1 GBP buys 17.42 ZAR on the interbank market having started the week at 17.65. High-street banks are offering rates in the 17.77-16.90 region, independent providers in the 17.22-17.26 region.
The geopolitical changes taking place in relation to trade are a major driver for ZAR and given the already bearishly inclined technicals, we see the downtrend in GBP/ZAR extending in the week ahead.
The Rand is strengthening on easing global trade tensions after President’s Trump and Xi agreed a trade-war cease-fire at the G20 summit on Saturday. This has resulted in a lift in sentiment for emerging market, commodity, and high beta currencies.
Sterling meanwhile remains weighed down by Brexit uncertainty as Theresa May continues what appears an increasingly forlorn attempt to drum up support for her Brexit deal.
With a range of potential outcomes on Brexit in play, chronic uncertainty is likely to keep the Pound under pressure, at least in the short-term. However, one analyst tells us that Brexit is likely to be delayed in 2019, ensuring the state of uncertainty extends for months keeping Sterling under extended pressure.
From a technical perspective, it’s a no-brainer: trend = down, and since the ‘trend is your friend’ more downside to come..
Add to this the fact GBP/ZAR has broken below the 200-day MA and you have a perfect bearish storm brewing.
The next target is at the 17.20 August lows, and a break below there would initiate another leg down to the May/June lows at 16.60.
Not all the technical indicators are negative - the RSI momentum indicator looks oversold and this suggests a high risk of a bounce at the 17.20 support zone, although we doubt such a bounce would result in a reversal of the trend, but rather a mere pull-back before downside resumes.
The South African Rand is likely to gain a boost at the US Dollar’s expense as sentiment continues to dim for the buck. The recent trade war ceasefire will weigh on the US Dollar which - counter-intuitively - tends to rise when tensions escalate and fall when they ease, because of safe-haven flows.
The Dollar is also likely to be pressured by commentary from Federal Reserve (Fed) officials, who are in charge of setting interest rates, considered the ‘food and drink’ of currencies. Fed Chairman Jerome Powell is set to speak at 15.15 GMT on Wednesday and many analysts will be parsing his comments for the latest insight on where the Fed is going.
Any suggestion of a pause in raising interest rates in 2019 will weigh heavily on USD, and, therefore, boost ZAR, because of the negative correlation.
The Rand: What to Watch
South Africa’s (SA) GDP growth rate is one major release for the Rand in the week ahead. It is forecast to show a rise of 0.6% in Q3 compared to Q2 when it is released on Tuesday at 10.00 GMT. This would constitute a substantial recovery from the -0.7% growth rate previously recorded.
A higher-than-expected GDP growth rate would be supportive for the Rand.
Analysts at Standard Bank are even more optimistic about a rebound than the consensus, seeing a 2.2% rise in Q3.
“Economic data for Q3:18 shows that while the mining sector likely contributed negatively to real GDP growth, the manufacturing sector and retail trade sectors likely contributed positively. From this, we infer an economic recovery for Q3:18.” Says Zaakirah Ismail, FIC Strategist at Standard Bank. “We see Q3:18 GDP rebounding to 2.2% q/q (saar) after the contractions of both Q1:18 (-2.6% q/q/ (saar)) and Q2:18 (-0.7% q/q/ (saar)). “
The other major release for the Rand is the current account which is forecast to show a deeper -176bn Rand deficit in Q3 from the -164bn deficit in Q2. Standard Bank is also more optimistic than the consensus about the CAD, expecting the deficit to shrink, at least as a proportion of GDP.
“We expect an improvement in the current account deficit (CAD) in Q3:18, to around 3.2% of GDP, from 3.3% in Q2:18. We also foresee an improvement in the CAD to around 3% of GDP in 2019, from an estimated 3.5% in 2018. The improvement is due to a more competitive Rand for most of 2018 and a likely terms of trade improvement,” says Standard Bank.
Again, if right this would be a positive influence for the SA unit.
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