South African Rand Under Pressure vs. Sterling but Forecasts Suggest too Early to call a New Trend

South African Rand

Image © Pound Sterling Live.

- GBP/ZAR rebounds on SA deficits and USD volatility

- Trend questionable though bearish status quo still dominant

- Brexit headlines to drive GBP; USD direction ZAR

The Pound is firmly back above the 18.00 threshold against South Africa's rand at the start of the new week; the gains to 18.10 coming despite a broad-based sell-off in Sterling, but it is too soon to say any follow-through gains are likely over coming days.

The gains made by Sterling add to the rebound experienced last week which saw GBP/ZAR recovering from a low of 17.33 to a high of 18.15, a rise of almost 2.0%.

The Rand is over a percent lower against the U.S. Dollar at 14.36, telling us that the weakness in ZAR is widespread.

A resurgent U.S. Dollar was a major factor in the sudden reversal after geopolitical concerns linked to the arrest of a high profile Chinese executive in Canada, on charges for fraud in the US, led to rise in safe-haven flows supporting the greenback.

A stronger Dollar means a weaker Rand since South Africa has a high proportion of debts denominated in Dollars which appreciate when the Dollar strengthens, becoming more expensive to service.

A widening fiscal and trade deficit for SA was a further factor weighing in the Rand that contributed to Sterling's outperformance.

The big question for forecasters now is whether this bounce is likely to extend and  evolve into something more substantial or not.

From a technical perspective the recovery so far is a little too small to herald a new uptrend, so we remain technical bears. However, a break above the 18.15 highs would provide confirmation that a short-term bullish trend was underway, increasing the chances a more formidable uptrend might evolve.

GBP to ZAR daily

Such a break would be expected to at least reach the trendline at 18.35-40. A break above the trendline would provide an even stronger signal of reversal.

GBP to ZAR 4 hour

As things stand, however, there remains a risk of recapitulation. The location of the 50-week MA just under the current move at 17.57 is likely to prove a tough obstacle to further down side, however, and would require a clear break below last week's 17.33 lows in order to green-light the downtrend's continuation. A break below the heavy support at 17.15 would provide further confirmation.

GBP to ZAR weekly

Such a break could see a move down to a tier of support at the 16.55s.

Bank-beating GBP/ZAR exchange rates. 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 South African Rand: What to Watch

Last week's data showed a deepening of the current account deficit to 3.5% which is negative for ZAR. This along with reports the state-owned utility Eskom requesting a R100bn bailout from the government may have contributed to the rise in GBP/ZAR, reflected in the technical's.

“SA's current account deficit (CAD) and fiscal balance remains large relative to its peers,” says Zaachirah Ismail, an FIC strategist at Standard Bank. “We continue to monitor CAD as well as news around the government finance's given widening deficits make the currency vulnerable to portfolio outflows.”

The main data highlights in the week ahead for the Rand are inflation data, employment data, mining stats, and retail sales, although none of these are likely to move the currency as much as U.S. Dollar volatility.

The Dollar has begun the week on the back foot after more dovish comments from Federal Reserve (Fed) officials weighed.

It now looks less likely the Fed will raise base interest rates as many times in 2019 as previously expected. This would have a negative impact on the Dollar since higher rates attract and keep greater inflows of foreign capital. What's negative for the Dollar is positive for the Rand.

The other possible driver of USD is the US-China trade relationship which after momentarily brightening at the G20 has once again soured following the arrest of Huawei executive Meng Wangzhou in Canada on charges brought by the U.S. for her involvement in illegal trade with Iran. The Chinese are warning Canada there will be directly consequences if they don't release her.

A key data release for ZAR is Inflation data in November on Tuesday at 9.00 GMT, which is expected to show a slight pickup to 4.3% for core inflation (excluding volatile food and fuel) and remain at 5.1% for broader inflation. Ismail forecasts interest rates to remain “steady” on the back of subdued food inflation over the next 12 months.

Retail sales also on Thursday at the latter time of 12.00 is expected to be a ‘bright spot’ and show a 1.7% rise in October compared to the 0.7% a year ago.

Mining stats on Tuesday at 10.30 are forecast to show a continuation of the existing decline with a -1.15% fall in October from -1.7% previously.

Employment data out on Tuesday is forecast to show a 0.2% rise in Q3 from the -0.7% in Q2.

Bank-beating GBP/ZAR exchange rates. 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