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Pound vs. South African Rand: Change in Trend Could Rest with Direction of Oil Prices

ZAR outlook

Image © Pound Sterling Live

- GBP/ZAR looks to flip into short-term uptrend

- But tough resistance must be challenged first

- Oil price surge pressures Rand lower

The Pound-to-Rand exchange rate is trading at 18.53 at the time of writing on Tuesday, April 23, over 1.6% higher than it was at this point one week ago.

The pair’s short-term downtrend during March appears to have stalled and probably even reversed, with a deteriorating technical structure behind the Rand apparently being fuelled by a surge in oil prices.

GBP ZAR weekly

The strong rebound witnessed over the last two days has probably flipped the short-term trend into positive territory.

The fact GBP/ZAR has broken back above the top of the consolidation range at the lows, and the midpoint or 50% level of the previous up move, is a bullish sign.

GBP to ZAR weekly

The pair has however now reached major resistance at the 50-day (and 200-week) Moving Averages located at about 18.55.

Moving Averages are technical indicators that tend to have predictive powers as moves in an exchange rate can often stall at these levels as traders layer market orders around them, while at the same time a break through them can often 'open the door' to even greater moves.

Therefore, for more upside from there, we would ideally wish to see a break clearly above the 18.60 level as this would probably confirm penetration and clearance of the MAs. Such a move would probably take it to the April highs at 18.73 initially.

The RSI momentum indicator - a measure of momentum - is rising quite strongly on the daily chart supporting the case for more upside on the horizon.

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The South African Rand: What to Watch this Week

The Rand is seen heading lower on Tuesday, April amidst a broader sell-off in emerging market currencies.

A spike in oil prices is seen as a major culprit, as rising fuel prices tend to act as a dampener on South African economic activity.

"The US decision to toughen its sanctions on Iran has boosted oil prices," says John Higgins, an economist with Capital Economics.

The US government announced that it will not renew the waivers from its sanctions that have allowed several countries – including China, South Korea, and India – to continue importing oil from Iran.

"This has pushed oil prices up by roughly 3% as investors worried about the knock-on effect on Iran’s output," says Higgins.

We look for any follow-through upside in oil prices to add to the Rand's recent decline.

"We doubt that this will last," says Higgins. "We still think that oil prices will fall sharply by the end of this year."

The reason Capital Economics expect oil prices to fall by year-end is owed to an expectation the recent weakness of global growth will persist for much longer than is commonly assumed.

On the domestic front, this morning saw the release of the South African Reserve Bank (SARB) composite leading business cycle indicator, which showed a healthy 2.0% rise.

The composite leading business cycle indicator increased by 2.0% on a month-to-month basis in February 2019.

Five of the ten available component time series increased while four decreased, with one remaining unchanged.

"The largest positive contributions to the movement in the composite leading business cycle indicator in February came from an increase in the number of residential building plans approved and an acceleration in the twelve-month percentage change in job advertisement space. The largest negative contributions resulted from decreases in the BER’s Business Confidence Index and the average number of hours worked in the manufacturing sector,” say the SARB in a release accompanying the data.

Unconfirmed reports have meanwhile come out that Finance minister Mboweni is considering the election of CEO Maria Remos to restructure failing state utility Eskom after the most recent state bailout.

The main fundamental economic factors impacting on the Rand in the week ahead are producer price inflation (PPI) out at 10.30 BST, on Thursday, April 25, and consumer confidence out at 8.00 on Wednesday.

“We forecast PPI inflation to rise markedly to 5.7% y/y in March from 4.7% in February, mainly due to the effect of higher fuel prices and to a lesser extent higher food prices,” says Peter Worthington, an economist at ABSA Bank.

Last week’s broad consumer inflation data rose but still undershot forecasts of a 4.6% rise in March, after coming out at only 4.5%, although this was still higher than the 4.1% previously. Most of the gains were as a result of higher fuel prices too. These are a non-core element more linked to global oil prices than domestic growth, so the release had little impact on the Rand.

Consumer confidence in Q1 is expected to reflect a variety of headwinds including higher taxes and fuel prices which are likely to have weighed on the index.

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