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- Short-term downtrend meets floor at 50-week MA
- Break below 18.00 required to invigorate bears
- Pound driven by wage data; Rand by inflation data
The Pound has been under pressure against the Rand over recent weeks but our analysis looks to a technical support level to provide near-term relief.
The Pound-to-South African Rand rate is trading at 18.30 at the start of the new week, having fallen 0.75% during the week before. The declines take the Pound to a 4% loss against the Rand on a rolling month-on-month basis, while for 2019 as a whole the exchange rate is now virtually unchanged.
Near-term, momentum therefore lies with the Rand: the pair’s short-term downtrend continues and given the old adage that ‘the trend is your friend’ we see the probabilities marginally favouring an extension.
Although the 50 and 200-day moving averages (MA) have been pierced there is still strong support lying beneath the current lows between roughly 18.35 and 18.00, and this is expected to present a major obstacle to bears.
The toughest layer of support is probably the 50-week MA at 18.14. The bearish forecast, therefore, is conditional on the 50-week being surpassed.
The February lows at 18.05 are a key make-or-break level for the pair and we would ideally like to see these breached for confirmation of a continuation lower.
A move below 18.00 would provide said confirmation. The next target to the downside would then be at roughly 17.75 and the bottom of the channel. Such a target could be reached in a week to a month.
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The South African Rand: What to Watch this Week
The Rand appears to have taken heart of late from a more assured global risk sentiment, with investors cheering signs of a potential turnaround in China's economic growth fortunes.
The Rand tends to rally when China's economy is on the up, as this tends to boost commodity prices, of which South Africa is a major exporter.
"Riskier assets closed Friday’s trading session in the green, buoyed by better-than-expected Chinese trade data, optimism over US-China trade talks and a positive earnings reports. China recorded a trade balance of US$32.65bn in March – up from US$4.08bn in February and higher than the market consensus for a US$5.7bn outcome, as exports rose by 14.2% y/y, while imports contracted by 7.6%. This helped to ease concerns about the global economy," says Mpho Tsebe with RMB.
Tsebe says this week will see investors eyeing China’s 1Q19 GDP data, due Wednesday as well as US-China trade developments and corporate earnings reports.
"Any signs that show that growth in China may have bottomed will fuel risk sentiment, benefitting riskier assets," says Tsebe.
On the domestic scene, inflation data is the main release on the agenda for the Rand this week.
Inflation is forecast to show a 4.6% rise in March, which would be quicker than the 4.1% previously. Higher inflation can be supportive of the Rand if it impels the central bank to raise interest rates since higher rates tend to attract and retain more foreign capital inflows.
Thanda Sithole, an economist at Standard Bank expects inflation to rise in line with consensus expectations but mainly because of a rise in the cost of petrol and food - both very volatile components, rather than due to a rise in core inflation. If the rise is mostly due to fuel and food it may not support the Rand as much, since it will not be as indicative of growth.
“We expect CPI of 4.6% y/y in March, from 4.1% y/y in February, in part due to base effects and sharply higher fuel prices. The petrol price increased 74c/litre in March, while diesel prices increased by 91-93c/litre. We expect food inflation to rise, from 2.3% y/y in February, averaging 4.0% in 2019,” says Sithole.
Standard Bank has also revised down its growth forecast for 2019 from 1.1% to 0.9% after poorer-than-expected mining and manufacturing data last week.
The Pound: What to Watch this Week
With the deadline for exiting the EU now having been delayed Brexit will probably be less of a driving force for the Pound in the short-term. Bear in mind parliamentarians are also on their Easter break, therefore headlines should fade in frequency for this politically-charged currency.
Instead, hard data will become a more important driver again, and the highlight will likely be UK labour market data out on Tuesday, April 16, at 9.30 BST.
Of the various labour market stats which will be released average wages will be the most important.
Average earnings are expected to show a 3.4% rise in February compared to the 3.4% previously, and wages including bonuses, a 3.5% rise. Forecasts are quite high and if the actual figures are even higher it would almost certainly give a lift to the Pound.
The Bank of England is keeping a close eye on wages and have suggested they could raise interest rates in 2019 should wage rises continue to be robust. And, expectations for higher interest rates at the central bank tends to be a positive driver of Sterling.
"We are anticipating that average earnings will show a pick-up in the headline rate of income growth in the 3 months to February to 3.6%y/y while regular pay rises by 3.4%. This would reflect the tightness that we continue to see in the labour market amid ongoing delayed corporate investment spending," says Henry Occleston at Lloyds Bank Commercial Banking.
Jobs are forecast to have increased by 180k 3 months-on-3 months in January from 220k in the December, and expectations are the unemployment rate remained at 3.9%. The unemployment allowance claimant count is forecast to be 20k in March from 27k in February.
If wage data is strong it is expected to warn of better retail sales data when it is released on Thursday at 9.30 BST given the close relationship between the two.
Current forecasts are for retail sales to show a -0.3% fall in March from 0.4% in February and a 4.6% rise year-on-year.
The other main release for the Pound is inflation data for March out mid-week, which is forecast to show a 0.3% rise compared to the 0.5% increase previously, and a 2.0% rise compared to a year ago.
Higher inflation tends to drive up Sterling since it usually results in the Bank of England (BOE) having to raise interest rates, and higher interest rates tend to attract higher foreign capital inflows.