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Pound vs. South African Rand 5-Day Outlook: Downtrend in Place, SONA Key Domestic Event to Watch

Ramaphosa

Above, right: File photograph of South African President Cyril Ramaphosa. The President delivers South Africa's State of the Nation address this week. Image © GovernmentZA, reproduced under CC licensing.

- GBP/ZAR could extend fall in descending channel

- Break below 17.30 key bearish confirmation level

- State of the Union Address dominates calendar for ZAR

The Pound-to-Rand exchange rate is trading at 17.48 at the start of the new week after falling almost 3.0% in the week before.

From a technical point of view, the exchange rate continues to fall in a descending channel which began at the August highs. It has now reached the mid 17s.The strength of the move lower last week biases it to continue.

GBP to ZAR daily chart

Momentum, as measured by the RSI indicator in the lower panel is declining, in line with the exchange rate, which is a bearish indicator.

A break below the rather important December lows, confirmed by a move below 17.30, would probably confirm a continuation down to the next target at 16.90 and the trendline drawn from the April ‘17 lows.

GBP to ZAR weekly

The pair has broken below all the major moving averages, including the 50 and 200-day, and week, MAs, further suggesting a bearish bias to the outlook.

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The South African Rand this Week: What to Watch

The Rand was driven higher in the previous week as a result of multiple factors. One was an improvement in the outlook for the global economy as a result of easing U.S.-China trade war fears, another was the rise in iron ore prices and a further boost came from lower oil prices.

The U.S. Dollar weakened in the previous week as the Federal Reserve signalled it would take a more cautious stance on raising interest rates going forward, a softer Dollar is beneficial to the South African economy, and by extension Rand, as much of SA’s debt is denominated in U.S. Dollars while the cost of importing falls as the Dollar falls.

The global picture is therefore constructive, for ZAR at present and as long as progress on U.S.-China trade relations continues and the Federal Reserve maintains a cautious approach to rates we would expect further ZAR upside.

Domestically, the major event in the week ahead to watch should be the State of the Union Address (SONA) on Thursday. This could shed light on contentious government policies such as plans for land ‘expropriation without compensation’ which has weighed on the Rand in the past. Another subject will be the future of the large state-owned power company Eskom.

“The upcoming State of the Nation Address (SONA) on Thursday should offer policy guidance, particularly on how to turn Eskom around as well as on expropriation without compensation,” says Thanda Sithole, an economist at Standard Bank.

Other data releases in the coming week are, “the economy-wide PMI and SACCI business confidence index, both for January, are due out this week. In the December, the PMI improved to 49 pts, from 48.2 pts in November; the SACCI business confidence index slipped to 95.2 pts, from 96.1 pts,” says Sithole.

However, we would expect domestic data to play second-fiddle to global drivers and any knee-jerk reactions by ZAR to these releases are likely to be faded.

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