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Pound vs. South African Rand Week Ahead Forecast: Bear Flag Signals Immediate Bear Threat in Short-Term

Pound to Rand rate

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- GBP/ZAR forms bearish flag pattern

- Longer-term, pair is stuck in range

- GDP data the Rand

The Pound-to-Rand exchange rate is trading around 18.41 at the start of the new week, about a third of a percent lower than a week ago, and studies of the charts suggest the exchange rate is set to continue its downtrend in the days to come.

GBP to ZAR 4 hour chart

The pair has formed a bearish flag chart pattern (see chart above) on the 4hr time frame which will probably break lower. We use the 4 hour chart to give us an indication of the short-term outlook which includes the coming week.

Such a move would take the exchange rate down to the range lows at 18.12. A break below 18.38, the May 30 lows, would provide bearish confirmation for the decline. This could happen over the next few days.

GBP to ZAR daily

Beyond the very short-term it is difficult to determine the direction of the next move - it could be higher or lower - since the pair is currently trading in a random, sideways, trend within a range.

Only a clear break above or below the range lows or highs would signal the establishment of a clearer trend.

A move below the range lows, for example, would see a new downtrend take root. Such a breakout would require confirmation from a move below 18.00, which would then probably see a decline down to a target at the long-term trendline situated at 17.60. This could evolve in the next 0-3 weeks.

Alternatively, a break above the range highs at 19.06 would lead to an extension up to an initial target at 19.40 and the March highs. This could unfold over the next 1-3 weeks.

GBP to ZAR weekly

The weekly chart above merely reinforces the trendless nature of the market. To escape the drunken sailor’s walk up and down the chart will require a break above either trendline A or B.

A move below the medium-term target of 17.60 could lead to a continuation down to the longer-term target at 17.00, and a break above the March highs at 19.40 to a target at 20.00. These could materialise over the next 4-12 weeks.

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The South African Rand; What to Watch

The most important domestic driver of the SA Rand in the coming week is probably Q1 GDP growth rate, which is forecast to show a -1.7% annualised nosedive (annualised means the quarter’s growth extrapolated over the whole year).

This compares to a 1.4% rise in Q4, due to power Eskom related power outages. If it is even lower than expected it could hit the Rand as it will raise the spectre of a credit rating downgrade. The data is out at 9.30 on Wednesday, June 5.

“GDP data for Q1 tomorrow will likely confirm persistently weak growth, largely due to power cuts and higher fuel prices in that quarter,” says Thanda Sithole, an economist at Standard Bank. “Already, we’ve seen weak volumes in the mining, manufacturing, retail sales, and electricity production sectors, all of which contracted in Q1. These four sectors account for 28.2% of GDP and contracted 2.2% q/q seasonally adjusted in Q1. We, therefore, estimate a GDP contraction of 1.3% q/q seasonally adjusted.”

Another major driver for the SA Rand is the performance of the U.S. Dollar to which the Rand is negatively correlated. This is due to the high degree of U.S. Dollar-denominated debt held by SA firms - when the USD rises those repayments become more burdensome.

The U.S. Dollar is looking technically weak and there is increasing pressure on the Federal Reserve (Fed) to downgrade its growth and inflation assumptions in line with broader market views. A change in Fed stance which is currently neutral could lead to a sell-off in the Dollar. A major Fed meeting in Chicago could be the forum for hints of such a change in stance.

The worsening trade war is starting to impact growth expectations both globally and in the U.S. and this could offset the safety flows the Dollar has been benefiting from so far as a result of risk aversion due to trade tensions.

The latest move in the China-U.S. spat is that China has published a policy paper on trade at the weekend accusing the U.S. of “intimidation”, “coercion” and “exorbitant demands”. The country has also started an investigation into U.S. logistics giant FedEx in China, citing customer complaints, and it wouldn’t be surprising if it banned Fedex from doing business there.

The impact of the trade dispute is taking an increasingly heavy toll on global manufacturing. Purchasing managers surveys released so far this week have shown that activity in Japan and the Eurozone contracted again in May, suggesting trade tensions as an underlying cause.

If the Dollar starts to weaken as a result of a downgrade in domestic growth expectations due to damage from trade tensions it could actually benefit the Rand.

Another longer-term positive for the currency is SA’s unique potential as a source of rare earth metals. These recently made headlines after China, the current main producer warned it might ban exports to the U.S. Rare earth metals are used in a wide variety of high technology components.

At the moment China produces over 80% of rare earth metals with Australia second, however, Africa, especially southern and eastern Africa are major sources of the metals according to geologists. Should SA be able to harness the potential of these metals it could become a major export for the economy, and boost the Rand in the process.

“It is widely acknowledged that, outside North America and Australia, southern and eastern Africa offer the greatest potential for rare earth production, especially in South Africa, Tanzania, Malawi and Mozambique. Kenya, Burundi, Zambia and Namibia are also mentioned,” says Ian Coles, a partner and head of the Global Mining Group at Mayer Brown LLP (quoted in the Financial Times).

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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