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Pound Hits Key Support vs. South African Rand

South African Rand outlook

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- GBP/ZAR to go sideways before further loses

- Pair is bouncing on key support from April lows

- Political appointments to influence Rand

The Pound-to-Rand exchange rate is trading at 18.40 at the time of writing, up over a half a percent on the day, as political uncertainty as well as a high profile resignation weigh son the Rand.

"The Rand this morning is trading from the back foot," said Andre Botha an analyst at TreasuryONE, a SA financial services company, in a note to clients. "This could be due to local factors as news has been filtering through about Cabinet reshuffles and the fact that the Eskom CEO did resign over the weekend."

Concerning the near-term outlook, from a technical perspective we see the pair has been in a short-term downtrend ever since the start of May.

GBP to ZAR 4 hour chart

Recently this downtrend has stalled at the 18.16 April lows and the trend has gone sideways and although the pair is picking up again today and reaching the top of the channel, there is still a high chance it will run into thick resistance at the top and start moving lower again.

Our forecast is for this sideways trend to probably extend in the week ahead, but then eventually weaken and break lower in line with the previous downtrend.

GBP to ZAR daily

The pair is currently trading in a narrow range between the April lows at 18.16 and the 200-day moving average (MA) at 18.46 and it is likely to extend. Eventually, however, over the next 2-6 weeks, perhaps, we expect a breakdown to a target at around 17.80.

GBP to ZAR day

The 17.80 target is based on the possibility that the pair has been forming an ABCD pattern since the March highs. These patterns tend to unfold so that the C-D leg is the same or similar length to the A-B leg, and in this case, it suggests an endpoint at 17.80.

This is also about the level at which the exchange rate would touch support from the trendline drawn from the 2017 lows.

GBP to ZAR weekly chart

The confirmation point for a sell-off would be a break below the May 16 lows at 18.09.

The next target below 17.80 is the November 2018 lows at around 17.35.

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The South African Rand: What to Watch this Week

From a domestic perspective, politics is likely to be a key driver of the currency, which could be impacted by the announcement of the final composition of Cyril Ramaphosa’s cabinet.

Whilst he had been expected to repoint Pravin Gordhan, the previous business and enterprise secretary, this may not happen now after a recent report from the public prosecutor, accusing Gordhan of contravening regulations when he was head of SARS.

Given Ramaphosa won the election on an anti-corruption ticket he may not be able to re-appoint his former ally Gordhan.

When Gordhan was finance minister he was seen as a ‘safe pair of hands’ and stabilising factor for the Rand so his exclusion from the cabinet risks undermining the currency.

What is certain is that whoever is named finance minister of the new cabinet will almost certainly impact on the Rand, based on historical precedent.

Of the hard data released, April PPI or producer price data is expected to be the most watched as it influences inflation expectations and therefore central bank policy.

The SARB almost cut interest rates at its previous meeting and any deterioration in inflation could tip it over into making a cut at the next meeting. Lower interest rates depreciate the local currency as they reduce net foreign capital inflows.

Current expectations are for a slight slowdown in PPI to 5.9% from 6.2% in April compared to a year ago, and of 0.8% from 1.3% compared to a month ago. The release is scheduled for 22.30 BST on Thursday, May 30.

Another key release for the economy is private sector credit which is forecast to rise slightly to 6.6% from 6.1% in April.

The SA trade balance is forecast to fall to R1.25bn from R5.0bn when released at 13.00 on Friday. Note that the trade surplus improved in March, to R5.0bn, from R3.9bn in February. Generally, a surplus is positive for a currency over time.

Last Friday the credit rating agency S&P released their latest review of SA and decided to maintain their current BB+ sub-investment grade rating with a ‘stable’ outlook.

“S&P explained its decision by arguing that with elections out of the way, the government would now begin to introduce ‘some reforms’ to boost growth and contain the fiscal deficit. In its outlook, S&P said that it could lower the credit ratings further if there was continued fiscal deterioration, or contingent liabilities crystallized, or growth weakened further, or if external financing pressures increased,” says Peter Worthington, an economist at ABSA bank.

GBP to ZAR investment

A major driver for the South African Rand is likely to be the performance of the U.S. Dollar, to which the broader Rand complex is strongly negatively correlated.

This is due to the high degree of U.S. Dollar-denominated debt held by SA firms, which means when the USD rises those repayments become more burdensome. The cost of imports are also priced in Dollars, so for instance when the Dollar rises so too does the cost of fuel imports and the overall cost of economic production.

The U.S. Dollar does not necessarily have any major events lined up in the week ahead, but it does look vulnerable from a technical perspective after forming a key reversal at the recent 2019 highs and divergence with RSI momentum.

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